Winners and losers from rent control

A new study of San Francisco’s rent control shows it raises rents for some

Rent control is a perennially contentious issue. Many housing activists see it as a logical and direct way to make housing more affordable. Economists are almost unanimous that it makes things worse by promoting disinvestment and decreasing supply. Particularly in the US, the very limited experience with actual rent control means that there are relatively few places where it can be studied, and so often we’re forced to try and generalize from the experience of the few cities that have it (New York), or from foreign lessons (we reported on a study of Berlin‘s rent control last year.)

Credit: David Yu, Flickr

San Francisco has had rent control for some time, and a new paper shines a very bright light on how rent control there has affected housing affordability and the local rental market.  The paper is entitled  “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” and is by Stanford economists Rebecca Diamond, Tim McQuade and Franklin Qian. From a research design perspective, the paper harnesses a unique aspect of San Francisco’s rent control law.  When originally adopted in 1979, the city rent control ordinance exempted small, “mom and pop” structures of four units or less. That changed in 1994, when a voter initiative extended rent control to smaller units built before 1980.

This discontinuity in San Francisco rent control system provides a convenient quasi-experiment for testing various hypotheses about the effects of rent control. As an experimental or treatment group, the study uses those pre-1980 1-4 unit homes that were subjected to rent control by the later 1994 changes to the ordinance. The control group is 1-4 unit homes built after 1980 but before 1992. One to four unit buildings may be the “missing middle” in other cities, but in San Francisco, they’re a major component of the housing stock, making up nearly 30 percent of rental housing in the city in 1990.

Rent control confers benefits for some, but raises rents for others

Those who are lucky enough to have a rent-controlled apartment garner substantial economic benefits, which Diamond, et al estimate as being worth about $2,300 to 6,600 per person annually, with total benefits of nearly $400 million per year. The benefits tend to go disproportionately to older and longer tenured renters. Those who are younger and have live in an apartment a shorter period of time are more likely to move out, allowing landlords to adjust rents upward (so called “vacancy decontrol”).

The standard economic argument against rent control is that it decreases the supply of rental housing: owners of current buildings have strong incentives to convert them to other uses (reducing the housing stock, and thereby pushing up market rents). Proponents of rent control point to some jurisdictions where rent control has had little apparent affect on housing stock, but these tend to be cities that have very weak or lenient systems of rent control: Laws that don’t limit rent increases don’t have adverse housing supply impacts. So what about San Francisco: It obviously lowers rents for those covered by the ordinance, but what has been the effect on housing supply?

Because rent controlled apartments give landlords a lower rate of return on their investment, many are looking for ways to opt out of rent control. Under California law, owners can evict tenants if they plan to occupy units themselves or if they resell the units as condominiums. In addition, landlords can offer tenants a buyout if they agree to vacate. As Diamond et al report, a key effect of San Francisco’s rent control ordinance has been to lower the supply of rental housing:

. . . compared to the control group, there is a 15 percent decline in the number of renters living in these buildings and a 25 percent reduction in the number of renters living in rent-controlled units, relative to 1994 levels.

As the pool of rental housing shrinks due to rent control, lower supply tends to push up rents market-wide. Diamond et al estimate that rent control has diminished rental housing supply by about 6 percent, and had the effect of driving rents up 7 percent. It doesn’t sound like much, but summed over the entire market, the value of the loss in welfare to renters is estimated at $5 billion.

Has rent control backfired?

One of the principal reasons for imposing rent control was to protect the ability of households of limited means to continue to be able to live in the city of San Francisco. And for some renters, it has clearly held down rents. But Diamond, et al point out that the indirect effect on housing supply have had the opposite effect, for several reasons. First, as we’ve related, owners have engaged in condo-conversions and buyouts, reducing the rental housing stock, with the effect that market-wide rents have risen. Landlords can also demolish older buildings, and their replacements aren’t subject to rent control. In addition, because landlords can raise rents to cover the costs of improvements, some landlords have renovated older units, raising their rents beyond the means of existing tenants. All of these actions are disproportionately concentrated in the cities higher income and better educated neighborhoods. Diamond and her co-authors explain the results:

Taken together, we see rent controlled increased property investment, demolition and reconstruction of new buildings, conversion to owner occupied housing and a decline of the number of renters per building. All of these responses lead to a housing stock which caters to higher income individuals. Rent control has actually fueled the gentrification of San Francisco, the exact opposite of the policy’s intended goal.

Wonky details: Big data and welfare economics

If you’re looking for a creative application of “big data” this is it. Diamond and her co-authors have assembled an impressive and extraordinarily detailed database to facilitate their analysis. They’ve identified and tracked all the individuals reported living in San Francisco in 1990. Similarly they’ve identified all the apartments in the city, including their size, age, and whether they’ve been renovated or sold. They match this to data that shows condo conversions, track city rent levels, and estimate zip code level rents for the city.

One of the criticisms of rent control levied by economists is that it leads households to stay in apartments which they be happier moving out of. Because rent control is tied to continued tenancy in a particular apartment, one might face a big rent increase if one moved to a different apartment, say in response to a change in jobs or household membership. Over time this produces a mismatch between the kind and location of apartment a household might like to live in and their rent-controlled apartment. Those for whom the mismatch grows too extreme, give up their rent controlled apartment and move elsewhere. But many stay, with their gains from rent control compensating them for the disutility of an apartment that no longer matches closely matches their preferences. Diamond, et al, examine these welfare effects and find that they are largest for younger households, who are more likely to experience changes in jobs or household circumstances that make remaining in their rent controlled apartment a larger departure from their preferences.

This study offers some of the most reliable and detailed analysis of the effects of rent control yet undertaken. It suggests that while there are some winners from rent control–those who have the good fortune to obtain rent-controlled apartments (especially older, and long-term residents whose housing preferences are unlikely to change), the net effect of rent control is at best mixed, and while some pay lower rents, others will end up paying higher rents.





Autonomous Vehicles: Does federal preemption shut down the laboratories of democracy?

There are a lot of details to be worked out to integrate autonomous vehicles into cities. Federal preemption could foreclose the opportunity of states and cities to help figure out the best ways forward.

It’s a touchstone of federalism that states and localities are the “laboratories of democracy”:  pilot testing new concepts before they’re rolled out nationally. But when it comes to autonomous vehicles, there’s a very real risk that federal preemption will close down these laboratories, at just the time their experimentation and innovation is most needed. Today, City Observatory is pleased to offer a guest commentary from Noah Siegel,* addressing the impacts of preemption.

By Noah Siegel

Congress is currently considering the AV START bill, which would be the first federal law to regulate automated vehicles (AVs). By most accounts, the bill has largely been crafted by industry leaders and looks to streamline and accelerate the introduction of AVs to American roads. There are many potential benefits to AV technology, but the bill includes an insidious clause that is sure to make everything worse: it preempts states and cities from providing any oversight, public information, or policy direction when AVs hit their streets.

It is a good rule of thumb that for every person dreaming up good policy at City Hall or an academic think tank, there are ten industry lawyers thinking about how to eliminate their authority. It may be helpful to look retrospectively at another example of preemption to understand how enormous the long-term impacts of preemption can be.

In 1994, online shopping was a glimmer in the eye of Jeff Bezos, who was founding a startup company called Amazon in Seattle. People were still excited about email, and browsers were just emerging to make it possible to “surf the web.” No one would have imagined that the most important legislation being discussed at that time was the Federal Aviation Administration Authorization Act. The primary objective of the law was to deregulate the package delivery business, ushering in our current era of competitive service from FedEx and UPS.

The FAA Authorization Act also included a preemption clause with long-lasting impact. It provided that no state may:

…enact or enforce a law, regulation, or other provision having the force and effect of a law related to price, route, or service of an air carrier when such a carrier is transporting property by aircraft or by motor vehicle.

The last three words were a coup for industry, effectively preventing any local taxation of package delivery. Although the full impact of preemption would not be understood for twenty years, some things were immediately clear. The law specifically included the Commonwealth of Puerto Rico, which had an existing excise tax on package deliver to the island. In May 2002, after a lengthy court battle, the Federal District Court granted summary judgement in favor of UPS under the FAA Authorization Act, effectively overriding the local statutory and regulatory scheme and preempting any similar taxes in other states.

The playing field was further tilted in favor of industry with the 1998 Internet Tax Freedom Act, signed into law by President Clinton to “promote and preserve the commercial, educational, and informational potential of the Internet.” To this end, the law prevented federal, state, and local governments from taxing electronic commerce transactions. With the industry in its infancy, the notion was that online retailers should not be subject to more sales tax than existing brick and mortar businesses.

Fast forward to 2017. Last year, e-commerce sales in the United States grew by over 11 percent for a total of $373 billion, and are projected to reach more than $500 million by 2020. Amazon alone accounted for around 60 percent of that growth, for a total share of over 40 percent of online sales. The effects can be felt in every community as major retailers shut their doors while Amazon opens new distribution facilities around the country. There is nothing inherently better about big box shopping, but this presents a major disruption in public finance.

Traditional retail establishments support public infrastructure and human services through payroll, income, property, and business licensing tax. In most states, consumers also pay sales tax. Many of these sources effectively disappear in online sales and the resulting business efficiencies, and companies are able to operate as free-riders on existing public infrastructure, pocketing the competitive advantage as profits. Although Amazon has committed to honoring local sales tax requirements, collecting these revenues remains a challenge for many states and is irrelevant for states like Oregon with no sales tax (ironically, Oregon Senator Ron Wyden was one of the sponsors of the Internet Freedom Act).

As roads, transit, and a variety of other public services bear the burden of a new real-time freight delivery system, they face a financial death spiral in maintaining those systems. The logical thing to do would be to tax e-commerce or package delivery to offset the loss of revenue from traditional retail establishments. Unfortunately, this was entirely preempted in 1994, the same year Jeff Bezos started selling books.

We would do well to keep this in mind as Congress considers the AV START bill. Automated vehicles could help us reduce carbon emissions, free up parking lots for public parks and housing development, and make personal car ownership a thing of the past. If they dramatically reduce the cost of driving, they could trigger additional demand and increase congestion, add to carbon emissions (if not electric), undermine public transit, and exacerbate inequities in the transportation system. The advent of AVs is the likely to be the greatest transformation of our cities since the introduction of the automobile, and it is far too early to preclude local innovation from figuring out the right set of policies to make sure that new technologies and business models serve the public interest.

A recent report from the University of Oregon’s Sustainable Cities Initiative cautions that there are also major implications for public finance. There is a scenario in which AVs are electric and are free to circulate on our roads without having to park. This would completely eliminate existing revenues from gas and parking that currently support our road infrastructure. Analysts at Deloitte also predict an increase in mobile retail, a trend that is already emerging with companies like Moby and Starship Technologies. This could further erode property taxes and add to urban congestion if left completely unregulated.

There are solutions to these dilemmas. As covered previously in City Observatory, ride-hailing companies Uber and Lyft have both expressed support for congestion pricing in cities. This is significant as both companies are looking to operate AV fleets in the near future, and they understand the need to shift our system from a consumption tax on fuel to a user fee for space on the roads. This could be calibrated to the time of day, level of congestion, the number of people in the vehicle, or the amount of space it takes up on the road.

These revenues would ultimately benefit companies like Amazon, Google, FedEx and UPS by maintaining core infrastructure, providing transportation alternatives to minimize congestion, and incentivizing and accelerating the transition to new and cleaner technologies. One seamless way to do this would be to integrate pricing technologies and into the new AVs from the very start, and to allow cities to design policies that deliver the best overall systems performance.

It is a not a radical idea to allow cities and local governments to lead on transportation policy and technological disruption. Before the advent of the automobile, roads were generally financed by local property taxes. When cars became ubiquitous, state and local governments adopted vehicle registration fees, fuel and weight mile taxes, and parking meters to help pay for and regulate automobiles and their externalities. All of this predated the federal gas tax and the interstate highway system. It is likely that local governments will need to foster a similar kind of innovation to cope with (and pay for) AVs.

These are the kinds of conversations about the public (and private) good that are in danger of being preempted by the current version of the AV START bill. This is a once-in-a-century opportunity to bring everyone together to reimagine what our cities could be, and we currently have a critical window of opportunity to get it right. Congress shouldn’t undermine this opportunity by preempting local innovation in favor of maximizing short-term profits. We can dream bigger.

*  –  Siegel is a Portland-based policy advisor and political strategist. He served in the office of two Portland mayors, and the Metro Regional Government. He recently launched the independent firm MSH Strategy, focusing on urban innovation, economic opportunity, and climate change. You can follow Noah at @pdxworld.


Signs of the times

“For Rent” signs are popping up all over Portland, signaling an easing of the housing crunch and foretelling falling rents

A year ago, in the height of the political season in deep blue Portland (in a county which voted 76 percent for Hillary Clinton) only one thing was rarer than Donald Trump lawn signs:  For Rent signs. Portland was facing a housing shortage.  Vacancy rates had been plummeting, and in early 2016, apartment rents were going up at double digit rates. The housing crisis prompted the City to adopt an ill-advised inclusionary zoning ordinance, and led the state to flirt with authorizing rent control. That was then.

What a difference a year makes. More new apartments are coming on line, and now for rent signs are more plentiful than mushrooms after the first autumn rains.  Take a look:

We photographed these signs in the space of about an hour on a recent sunny afternoon in Portland’s close-in East side neighborhoods. These signs are all in front of existing, older apartments. In addition, the Portland area is seeing an increasing number of new apartments coming on to the market.  Between freshly built new apartments and a profusion of vacancies in existing buildings, the rental market appears to be changing. After lagging well behind growing demand for the past several years, housing supply is catching up. And this is just starting to have an effect on rents.  According to data compiled by Zillow, inflation in Portland area rents fell from a peak of more than 10 percent year over year in 2015 and 2016, to less than zero in August 2017.

The big question going forward is whether rents will decline in earnest.  The current abundance of vacancies and the 19,000 or so new apartments in the pipeline in the City of Portland and coming on the market in the next few months suggest that this is a distinct possibility.

What’s happening here is a good example of how the market works. To be sure, Portland, like a lot of cities, has experienced a temporal mismatch between demand and supply. In the wake of the great recession, demand turned around quickly as more people moved to the region and job growth returned, but new apartment construction has taken several years to rebound from the downturn. For several years, culminating in 2015 and 2016, demand outpaced supply, and pushed down vacancy rates, causing rents to surge. Now it appears the reverse is true–the number of new units being delivered to the market is growing faster than demand for housing–which is producing this bumper crop of for rent signs. The more apartments stand vacant, and the longer they go unfilled, the greater the pressure on landlords to drop prices. Already, some newer apartments are offering move-in bonuses, like a months’ free rent. It’s a sign that the market is turning.

What the signs mean

Ultimately, we think this flowering of “for rent” signs disproves two of the most durable myths about the housing markets.

The first myth is that you can’t make housing affordable by building more of it, particularly if new units are more expensive than existing ones. The surge in vacancies in existing apartments is an indication of the interconnectedness of apartment supply, and an illustration of how construction of new high end, market-rate units lessens the price pressure on the existing housing stock. When you don’t build lots of new apartments, the people who would otherwise rent them bid up the price of existing apartments. The reverse is also true: every household that moves into a new apartment is one fewer household competing for the stock of existing apartments. This is why, as we’ve argued, building more “luxury” apartments helps with affordability.  As our colleagues at the Sightline Institute recently observed, you can build your way to affordable housing. In fact, building more supply is the only effective way to reduce the pressure that is driving up rents.

The second myth is that high rents are somehow the product of an epidemic of greed on the part of landlords. There’s no evidence in Portland that landlords have suddenly had a change of heart, renounced avarice and decided to stop raising rents. Landlords find it difficult to get new tenants if they’re charging higher rents than the apartment down the street.  With so may “for rent” signs, landlords who want to hike the rent are going to have to wait a long time to find tenants. As our colleague Daniel Kay Hertz observed, the reason that housing is more affordable in Phoenix than San Francisco is not because Arizona landlords are somehow uniformly kindlier and more generous, but because the supply of housing is so much more elastic. The most effective check on “greedy landlords” is lots of competition, in the form of more supply.

We’ll watch the situation closely in the next few months, but all the signs point to an improvement in Portland’s housing affordability.

Metro economies pulling away nationally

Unemployment rates are down in cities, especially for those with less education

One of the trends we’ve been following at City Observatory has been the increasing shift of the driving forces of the nation’s economy to large metro areas, and within these areas to cities. The industries that are flourishing in today’s economy are ones that are most competitive and productive in urban environments. As a result, the locus of opportunity in the US is shifting toward cities, and away from rural areas. There are a variety of ways of measuring this shift, and one is to look at trends in the labor market, with a focus on variations in unemployment rates over time between cities and rural areas.

A new study from the Board of Governor’s of the Federal Reserve System, Labor Market Outcomes in Metropolitan and Non-Metropolitan Areas:  Signs of Growing Disparities, charts the relative progress of urban and rural areas in reducing unemployment. Fed Economist Alison Weingarden notes that as the economic expansion has proceeded, unemployment rates have come down much more sharply in large metro areas than in smaller ones and in rural areas.  In the 1990s and the first decade of the 2000s, unemployment patterns among prime aged workers (those between 25 and 54) were fairly similar, and followed similar paths in large metros, smaller ones and rural areas.  But since the Great Recession, a widening gap has emerged between relatively prosperous metro economies and struggling rural ones.  Overall, unemployment rates in rural areas, which were roughly comparable to those in metro areas during the depths of the recession, are today noticeably higher. The latest data show rural areas unemployment rates seemed to have bottomed out at 5 percent, small metro areas have settled around 4.5 percent, and large metro areas have overall unemployment rates below 4 percent.

The economic fate of those with lower levels of education also seems to be relatively worse in rural areas.  The Fed report compares the unemployment rate of those with a high school diploma or less in rural areas with those with the same level of education living in metro areas.  Prior to the Great Recession, the two rates were similar, and during the worst of the recession and in the earlier years of the recovery, it was noticeably better for your employment prospects to be in a rural area if you had a limited education. But in the past four years, the unemployment rates for high school graduates in metro and non-metro areas have diverged sharply.  Today, unemployment rates for those with just a high school diploma are nearly 2 percentage points higher in rural areas than in metropolitan ones.

These data are consistent with a continuing shift of economic activity to urban areas, and the limited opportunities, especially for those with less education, living in rural areas. Another implication of this data point is that even those with relatively less education (just a high school diploma) have better prospects of being employed if they live in a metro area than if they live in a rural one.

Weingarden, Alison (2017). “Labor Market Outcomes in Metropolitan and Non-Metropolitan Areas: Signs of Growing Disparities,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, September 25, 2017,

Transportation equity, part 2: the Subaru and the Suburban

Flat per vehicle registration fees charge lower rates to wealthier households with more road damaging vehicles

The prospect of shifting from using a combination of vehicle registration fees, fuel taxes and general revenues to pay for roads, to a system of road pricing, which would charge vehicle users only for the amount of time they travel on expensive and congested roadways has provoked claims that its somehow inequitable. Last week, we took a look at the average incomes of people who drive to work at peak hours, compared to those who walk, bike or take transit. Peak hour drivers have average household incomes nearly double those of other commuters. On average, road pricing systems that employ peak hour fees will tend to put more of the burden of paying for roads on those with higher incomes.

One of the assumptions of those who question the “fairness” of road pricing is the notion that somehow our current system of paying for roads is a fair one. But what’s equitable about our current system of paying for roads? Not much, as it turns out. Today, we’ll take a close look at a principal way that many states pay for road:  vehicle registration fees. In Oregon, for example vehicle registration fees account for about 35 percent of the roughly $900 million the state collects annually in fees on passenger vehicles and light trucks. In Oregon and many other states, these registration fees or “car tabs” are flat fees that aren’t related to a vehicle’s value, or how much its driven, or how much wear and tear in causes on public roadways.

Two of the foremost principles of public finance are the “ability to pay” principle and the “benefit” principle.  The ability to pay principle means those with higher levels of income ought to be expected to pay more toward the cost of public services than those with more limited means.  The benefit principle means that costs ought to be allocated to people in proportion to the benefit they receive from public services. Fixed, per vehicle registration fees violate both these tenets of public finance.  Vehicle fees aren’t related at all to how much damage a vehicle does to the roadway (a proxy for repair and maintenance costs), nor are they related to the income or ability to pay of the vehicle owner.

To show how inequitable this can be, let’s look at a particular case in point:  two car-owners in the Portland metro area. One is a City of Portland resident who owns a 15-year old Subaru Outback; the other is a resident of suburban Clackamas County who owns a nearly new Chevrolet Suburban. The Portland resident lives close to most of her common destinations, and has good access to transit and bikeways, and so drives her aging Subaru about 6,000 miles per year. The Suburban-owning suburbanite has to commute a long distance to work, and drive to most common destinations, and ends up putting about 15,000 miles on her vehicle.  (We’ve chosen our two examples to represent some of the most blatant inequities in the current system; as it turns out, Multnomah County’s local fee is primarily to pay for a bridge across the Willamette River that’s used both by residents of Multnomah and Clackamas Counties; but Clackamas County declined to impose a registration fee on its residents).   Here are our two sample vehicles.

2002 Subaru Outback2017 Chevrolet Suburban

In Oregon, all vehicles currently pay a flat registration fee.  In most counties, vehicles pay just the state fee; in Multnomah County, where Portland is situated, there’s an additional local registration fee, collected by the state.  We’ve gathered data from current Craigslist advertisements for the two different vehicles shown below. Here’s the annual cost of registering our two vehicles, in 2017.

Vehicle 2002 Subaru Legacy 2017 Chevy Suburban
Market Value $4,000 $53,000
County Registered Multnomah Clackamas
Registration Fee (Annualized) $62 $43
Fee/Value 1.6% 0.08%
Miles/Year 6,000 15,000
Fee/Mile $0.010 $0.003

The 2002 Subaru pays a $62 fee per year; its Suburban counterpart pays a $43 fee. How do these fees relate the their owner’s ability to pay and their use of the roadway? First, as a share of each vehicle’s value, there’s a huge disparity.  The Subaru’s annual registration fee works out to about 1.6 percent of its value; the Suburban is taxed at a rate of just 8 one-hundredths of one percent of value–about 20 times less. In general, there’s a strong relationship between the value of vehicles owned and personal income, so viewed from the perspective of ability to pay, flat vehicle registration fees are highly regressive. If registration fees in Oregon were tied to a vehicle’s value and the Suburban owner paid the same rate as the Subaru owner does today, her registration fee would be over $800, rather than $43.

A second way to look at registration fees is to work out how much per mile driven each vehicle owner is asked to pay.  As a practical matter, the cost of vehicle registration per  additional mile driven is zero. But let’s focus on how much money state and local governments are collecting when visualized on a per mile basis.  The Subaru driver, who travels 6,000 miles per year, pays a vehicle registration fee that works out to about 1 cent per mile. In contrast, the Suburban driver (living in a suburban county with a lower annual fee) who drives 15,000 miles per year, pays just three-tenths of one cent per mile.  So the net effect of fixed, per vehicle registration fees is to load more of the costs of driving on those who burden the system least, and effectively subsidize those who drive the most.

When people talk about road financing, we usually focus on the gas tax.  But for those who drive fuel efficient vehicles relatively few miles per year, the vehicle registration fee is actually almost as big a cost as the gas tax.  Oregon currently charges a 30 cent per gallon state gas tax.  Our Subaru driver, going 6,000 miles per year at 25 miles per gallon buys about 240 gallons of gasoline annually, and pays a total state gas tax of $72–only $10 more than her registration fee.

The violation of the “benefit” principle by the flat registration fee is amplified by the fact that larger vehicles cause dramatically more wear and tear on pavement than lighter ones. Estimates vary, but a good rule of thumb is that road wear increases with the fourth power of the weight of a vehicle. This means that a 5,600 pound Suburban causes about ten times as much road wear as a 3,100 pound suburban. (The math:  5,600 raised the the fourth power is about ten times 3,100 raised to the fourth power). And in our example, since the Suburban is driven three times as many miles as the Subaru, the combination of its greater weight and more driving means that on an annual basis its doing 30 times as much damage to the roadway. (And we’ll completely ignore whether the Suburban has studded tires, which collectively do an estimated $50 million in damage to Oregon roadways each year).

Whether we look at it from the standpoint of ability to pay or from the standpoint of the benefit principle, there’s little that’s fair about the system of charging flat registration fees that bear no relationship to a vehicle’s value, how much its driven, and how much wear and tear it causes to the roadway. It’s reasonable to ask whether any new proposed system of road pricing is equitable; but if we apply the same test to major features of the existing system, we find it wanting to an even greater degree. If we’re really interested in making the road pricing system fairer–especially to those low and moderate income households with older, less valuable cars, who drive shorter distances–we ought to move away from flat per vehicle fees, to charges that are related to how much people drive, and how much wear and tear their cars cause to the roadway.


Back at the ranch

What the ranch house teaches us about house prices and filtering.

Back in the heyday of the post-war housing boom, back when the baby boomers were babies, America was building ranch houses–millions of them. In its prime, the ranch house was the embodiment of the middle-class dream, and newly built suburbs across the nation were full of them. The relative modesty and similarity of the ranch home is a good reflection of the nature of the housing market in those years. And, as we’ll see, what’s happened to the ranch house since then is an important reflect of the way housing markets work–or don’t work–today.

Sunset Magazine helped popularize this California style when it published a book full of Cliff May’s ranch home designs in 1946, and the idea spread, with modest regional adaptations, to the entire country and was undoubtedly the dominant housing type of the 1950s. By 1950, the ranch style accounted for nine out of every ten new homes built in the country. Even Levittown had its own “Rancher” model, a 2-bedroom, one-bath starter home with room for expansion, that sold for as little as $8,900 in 1953.  The kind of wide regional variations in housing prices we see today were much more muted in the 1950s. Contemporary home price listings show that in the mid to late 1950s ranch homes sold for prices in the mid-teens all over the country from Mansfield, Ohio ($17,900 in 1954), to Pittsfield, Massachusetts ($14,300 in 1957) to Appleton, Wisconsin ($16,500 in 1959).

The American Dream, circa 1955. (

Even with the regional variations in materials and finishes, the ranch homes and their close variants shared the same modest proportions: Two or three bedrooms, all constructed on a single level, with one or occasionally two bathrooms, and averaging 1,000 or perhaps 1,200 square feet. They usually had a single car garage or carport. It was the idealized, suburban middle class lifestyle that skid row shop clerk Audrey (Ellen Greene) dreamed of in Little Shop of Horrors

More than a half century later, the ranch house has fallen out of style. American homebuyers now want bigger houses, with multiple levels, fancier finishes and architectural details that would never fit on the simple ranch house. But while we’re not building any new ones, most of the old ranches are still around, although they now occupy a considerably different place in the housing spectrum than they did when they were new.  The median owner-occupied home in the United States was built just before 1980, meaning that almost everywhere, ranch homes are now much older than the average house on the market.

If housing were simply about shelter, then you would expect all of these houses that commanded roughly the same price when they were built 60 or more years ago to have experienced roughly the same amount of depreciation over time. But that’s far from the case. To get an idea of how much variation there is across markets in the contemporary value of ranch homes, we combed through Zillow home listings to find some 1950s era smaller homes that are for sale now.  (Our selections were haphazard and don’t represent a random or scientific sample, but were chosen to represent how much variation there is across markets). Here’s what we found:

Kansas City
Menlo Park

Depending on where you are, today your ranch home could cost anywhere from as little as $25,000, in some neighborhoods in Cleveland and Kansas City, to as much as $1.6 million in one of the tonier suburbs of Silicon Valley (Menlo Park).  The reason for the difference has little to do with the houses themselves (though there’s no doubt the Menlo Park model is much more nicely painted and maintained that its low priced cousins). It has everything to do, instead, with the housing markets that they’re situated in, and the way in which those markets are regulated.

In markets with weak demand for housing, because of slow economic growth or decline, or simply the hollowing out of first-tier suburbs because of sprawl–Cleveland, Kansas City– the humble ranch home is very cheap. The ranch home is also pretty darn cheap in places with a highly elastic housing supply (Atlanta, Houston), where its relatively easy to build new houses or bigger ones in place of smaller ones. But the higher the demand in a housing market, and the more constraint on building new units, the higher the price the ranch home commands, despite its advanced age, limited adornment, and cramped rooms. With its short commute to Silicon Valley, the tiny old ranch home commands a price that would easily buy a palatial new McMansion in any other part of the country.

As a result, to varying degrees, in most parts of the country, these aging ranch homes are a primary source of affordable housing opportunities. If you are a first-time home buyer, or have a limited income, the ranch home may look like a reasonably priced fixer-upper that enables you to enjoy the benefits of homeownership. But in those places where the housing supply is constrained, households that would otherwise be buying big new homes find themselves bidding up the price of little old ranch houses. So instead of “filtering” down market as they age, our ranch home continues to be occupied by upper income households. (It may even move up-market).

The lesson here is that houses are not merely bundles of sticks, and that the affordability of housing isn’t determined by the historic sunk costs of the materials that went into building them. Judged by a physical assessment of the bill of materials that went into their construction–so many yards of concrete, bricks, board feet of two-by-fours, square feet of plywood, lengths of pipe and wire, and number of windows–the seven surviving ranch houses here are nearly indistinguishable one from another. What makes some affordable, and others not is the policy decisions over the subsequent decades about how easy or difficult it would be to build additional housing nearby.

The myth of naturally occurring affordable housing

Block that metaphor! There’s nothing “natural” about “naturally occurring affordable housing.”

There’s a new term that’s gaining currency in some housing policy circles: “naturally occurring affordable housing.”  It even has a catchy acronym: “NOAH.”  There’s a recent report from Co-Star (the real estate advisory firm), issued in collaboration with the Urban Land Institute and the National Association of Affordable Housing Lenders, which inventories the number of such naturally occurring units in each of the nation’s large metropolitan areas (they count about 5.6 million).

Even conservative think tank the Manhattan Institute has employed the term, arguing that Mayor Bill de Blasio’s affordable housing program is unnecessary because the city has a reservoir of “naturally occurring affordable housing” that are currently available and require no additional government investment.

The term is a new coinage. A quick search of Google shows no instances of the phrase “naturally occurring affordable housing” appearing prior to 2007. There were fewer than 10 websites using that term in the years up through 2013, and in 2014, “NOAH” began to take off. There were 66 occurrences in 2014, 39 in 2015 and 125 in 2016. And 2017 is on pace to break that with almost 90 instances in the first quarter alone.

The implication is that there are two ways to get affordable housing: to have the public sector subsidize it–usually through some combination of low income housing tax credits on the front-end and Section 8 vouchers for tenants on the back-end. There’s also conventional public housing, owned and built by the public sector. And then, in contrast there’s this second kind of affordable housing: “naturally occurring,” which is privately owned and operated, and just happens to charge rents that are affordable to low and moderate income households.

A cave: Actual “Naturally Occurring Affordable Housing” (Flickr: Adifferentbrian)

Block that metaphor!

Basalt, glaciers, arable land and virgin forests are all naturally occurring. So are clouds, insects, and mountains.

While there’s nothing wrong with affordable housing that doesn’t currently rely on direct government subsidies, there’s something profoundly misleading with the term “naturally occurring.”

There’s nothing “natural” about it. Housing markets and the process of investment, decline, and filtering, are all profoundly influenced by a range of policies, from the federal government’s subsidies to housing and highways, to local land use decisions. The process of investment and neighborhood change that results in used housing is “anything but natural” as the University of California’s Karen Chapple and her colleagues put it in a recent report to the California Air Resources Board:

The story of neighborhood decline in the United States is oft-told. While early researchers naturalized processes of neighborhood transition and decline, the drivers of decline are anything but natural and stem from a confluence of factors including: federal policy and investments, changes in the economy, demographic and migration shifts, and discriminatory actions.

(Ironically, that doesn’t stop the authors from also using the term “naturally occurring affordable housing” four times in their report, juxtaposing that with Section 8 vouchers and deed-restricted affordable housing units.)

Naturally occurring conjures up visions of mineral deposits, or mountain ranges or a benign climate.  But the existence–or non-existence–of affordable, privately owned housing has everything to do with a wide range of conscious public policy choices that simply don’t belong in the category of natural occurrence.  The danger with this term is that it implies that there’s really nothing that we can or should do to promote market housing–it’s naturally occurring, right? It’s either going to be there or it isn’t, so there’s really no point trying to influence it.  And if your community doesn’t have enough, well, then there’s really not much you can do about it.

What that misses, of course, is that public policies, especially local zoning requirements, building codes, parking requirements, development fees and the like have everything to do with whether the private market provides housing that is affordable. When we ban apartments from wide swaths of most communities, when we outlaw affordable micro-units in desirable neighborhoods, when we subject development to a wide range of discretionary and arbitrary approval processes, and when we impose enormous costs in the form of parking requirements, we’re making sure that the private market doesn’t produce housing that is affordable.

And as we’ve noted, the whole process of filtering, where, as housing ages it becomes more and more affordable, is contingent on allowing an ample supply of new housing, even when those new units are themselves more expensive than low and moderate income households can afford. The only reason that some communities have plenty of what gets called “naturally affordable” housing is that they made it relatively easy to build new housing and that in turn led housing to filter downward and become more affordable.

In contrast, many communities–we’re looking at you, San Francisco–made it really difficult to build any new housing, with the result that a lot of older units which would have filtered down market as they aged, became the only feasible housing alternative, and consequently their prices got bid up so that they didn’t become more affordable as they got older.

So by all means, let’s talk about the role of markets and privately owned housing in addressing affordability; but let’s not use a term that intrinsically isolates this from the policy arena.

The hamster wheel school of transportation policy

Going faster doesn’t mean your city gets anywhere more quickly, and it doesn’t make you happier

One of the key metrics guiding transportation policy is speed:  how quickly can you get from point A to point B. But is going faster a good guide to how we ought to build better places?

When it comes to driving, in particular, the evidence is making cars go faster doesn’t make places better to live in.  In fact, just the opposite. That becomes clear when we look at a cross-section of cities, and see how the variation in average roadway speeds corresponds to measures of happiness.  Cities with higher travel speeds just tend to have more sprawling development patterns, and require people to drive further for common destinations. Those who live in faster moving places are, on average, less happy with their transportation systems than those who live in slower places. In effect, optimizing a transportation system for speed is just a kind of hamster-wheel school of transportation policy: the wheel goes around farther, but we’re still not going anywhere.

To begin with, we’ve got estimates of the average speed of travel in different metropolitan areas developed by the University of California’s Victor Couture. His data shows that average travel speeds in some metropolitan areas (like Louisville) are 22 percent faster than in the typical large metro area; while in other areas they are slower. Miami’s speeds average about 12 percent less than the typical metro.

The second part of our analysis considers how happy people are with the transportation system in their metropolitan area.  Here we examine survey data generated by real estate analytics firm Porch. They commissioned a nationally representative survey of residents of the nation’s large metropolitan areas and asked them how they rated their satisfaction with their local transportation system on a scale of 1 to 5, with 5 being very satisfied.  We compared these metro level ratings of satisfaction to Couture’s estimates of relative speeds in each metro areas. There’s a bit of a time lag between the two data sources: the survey data is from 2015 while the speed data is from 2008; but as we showed yesterday, the 2008 speed data correlates closely with an independent study of traffic congestion levels in 2016, suggesting that the relative performance of city transportation systems hasn’t changed much in that time period.

Faster Metros don’t have happier travelers

The following chart shows happiness with the regional transportation system on the vertical axis, and average speed on the horizontal axis.  Higher values on the vertical (happiness) scale indicate greater satisfaction; larger values on the horizontal (speed) scale indicate faster than average travel speeds.  The data show a weak negative relationship that falls short of conventional significancel tests (p = .16).  While there isn’t a strong relationship between speed and happiness, if anything it leans towards being a negative one; those who live in “faster” cities are not happier with their transportation system than those who live in slower ones.


We have a strong hunch as to why traveling faster might not generate more satisfaction with the transportation system. Faster travel is often correlated with lower density, and longer travel distances to common destinations, such as workplaces, schools and stores. If you have a sprawling, low density metropolitan area, with great distances between destinations, much of the potential savings in travel time may be eaten up by having to travel longer distances. A complementary explanation is that places with faster speeds, may be ones where proportionately more travel occurs on higher speed, higher capacity roads, such as freeways, parkways and major arterials, as opposed to city streets. The higher measured speed may a product of traveling long distances at high speeds in some cities, as opposed to cities with much shorter average trips on slower city streets.

Faster travel is correlated with more driving

To explore this hypothesis, we compared average vehicle miles traveled (VMT) per person per day, as reported by the US Department of Transportation, to the average estimated speeds for metropolitan areas.  Both of these sets of observations are for 2008. The following chart shows VMT per capita on the vertical axis and average speed on the horizontal axis. As we thought, there’s a strong positive relationship between speed and distance traveled. People who live in places with faster speeds drive more miles per day.

More driving is associated with less satisfaction with metro transportation

To tie this all together, we thought we’d look at one more relationship:  How does distance traveled affect happiness with an area’s transportation system? This final chart shows the happiness (on the vertical axis) and vehicle miles traveled (on the horizontal axis). Here there is a strong negative relationship: the further residents drive on a daily basis, the less happy they are with their metro area’s transportation system.

We think this chart has an important implication for thinking about cities and transportation. Instead of focusing on speed, which seems to have little if any relationship to how people view the quality of their transportation system, we ought to be looking for ways to influence land use patterns so that people to have to travel as far. If we could figure out ways to enable shorter trips and less travel, we’d have happier citizens. It’s time to get off the hamster wheel.

The Week Observed, October 13, 2017

What City Observatory did this week

1. The constancy of change in neighborhood populations. The canonical story of gentrification focuses on the fact that many of the people living in a neighborhood today are not the same ones who lived there a decade ago. The implication is that, absent gentrification, neighborhood populations change slowly, if at all. But careful longitudinal studies show that constant turnover in population is a regular feature of neighborhood dynamics, whether the neighborhood is gentrifying or not. Half of all renters have moved in the last two years, and the rate of movement isn’t significantly affected by gentrification, according to a recent study.

2. Block that metaphor: “Naturally Occurring Affordable Housing.”  There’s a new term of art that’s floating around the housing world:  “NOAH” or naturally occurring affordable housing. It’s a catchall that’s used to describe privately owned housing that’s being rented at affordable price points, and is meant to differentiate this private market housing from public housing and housing getting Section 8 vouchers. In our view, calling affordable market housing “naturally occurring” conceals the important fact that it’s highly dependent on conscious local policy decisions, like zoning, parking requirements and permit review processes. Unless you live in a cave, your housing didn’t “occur naturally,” and whether its affordable depends directly on whether local land use controls allowed enough housing to get built to meet local demand. There is a real danger that calling market housing “naturally occurring” diverts policy attention from where it is most needed.

Must read

1. Policy tokenism:  Arlington, Virginia’s ADU ordinance. We’re big fans of a range of “missing middle” housing policies, which aim to provide for a range of housing types beyond the usual dichotomy of single family homes vs. big apartment buildings. One of the ways to add density and affordability in predominantly single family neighborhoods is to liberalize the construction of accessory dwelling units (ADUs), also known as ‘Granny Flats.’ Greater Greater Washington reports that Arlington, Virginia adopted an ordinance allowing them in 2009, but in the time since, just 20 ADUs have been built, mostly because of the onerous requirements the city imposes: they must be owner-occupied, with deed restrictions limiting their use, and can’t be physically separate from an existing structure. Though well-intended, the ADU ordinance is falling well short of its potential to promote affordability and aging-in-place; it’s a reminder that solving our housing problems can only happen at scale.

2. Harlem’s Black Churches Cash in on Gentrification. DNAInfo reports that more than a dozen black churches in Harlem have sold out, literally, to developers in the past several years. Church leaders are faced with dwindling congregations and financially attractive offers from developers–who typically are looking to build market rate housing in place of houses of worship. The article notes that the churches were once better supported, but a combination of shifting demographics, and the growth of alternative outlets for black political activism has put them in a more tenuous situation. Local residents fear the loss of churches will accelerate the decline of the black community, and “Save Harlem Now” is organizing to explore policy options, like allowing the air rights above churches to be sold separately, as a way to tap the development value while retaining the churches.

3. The economic divide between big cities and smaller ones. An article by Eduardo Porter in The New York Times picks up a theme we’ve been emphasizing for the past two years at City Observatory.  The nation’s largest cities and metro areas are powering economic growth, as smaller cities and metro areas lag. Porter’s article notes that private employment grew almost twice as fast in large metropolitan areas as it did in small ones from the trough of the recession in 2009, to 2015. The key reasons are well known to City Observatory readers: talented workers are increasingly concentrated in larger cities, and as a result, these cities are more productive and innovative.

4. America’s housing subsidies are skewed to the rich. It’s not new news, but Apartment List has a graphic analysis of how lavishly the federal government subsidizes housing for high income Americans as compared to those with the lowest incomes. The mortgage interest deduction flows overwhelmingly to the highest income households; while only about 1 in 5 eligible low income households benefit from Section 8 housing vouchers. The net result: the federal government spends about three and a half times as much per household subsidizing well off households as poor ones.


New Knowledge

Who uses ride-hailing services and why. A new study from Regina Klewlow and Gouri Shankar Mishra of the University of California, Davis, reports the results of a survey of Americans about their use of ride hailing services. Overall, only about 21 percent of Americans in large cities have signed up for these services, although another 9 percent have ridden in rides hailed by others. Use of ride-hailing skews towards the higher income, young, the well-educated, and the urban:  You are about three times as likely to use ride-hailing if you’re under 30 as opposed to 50 to 64; about twice as likely if your income is over $150,000 rather than under $35,000, likewise if you have a BA as opposed to just a high school degree, and the same margin holds if you live in a city, rather than a suburb. And interestingly, according to this study, Uber is all about eating, drinking and partying: some 62 percent ride-hailing users say their trips are to restaurants, bars or parties. Little surprise that 33 percent of users report that they use ride-hailing to avoid driving while under the influence of alcohol.  Finally, the most commonly cited reason for using ride hailing is to avoid the expense and hassle of parking.

UC Davis, Institute for Transportation Studies, Research Report – UCD-ITS-RR-17-07, Disruptive Transportation: The Adoption, Utilization, and Impacts of Ride-Hailing in the United States, October 2017

In the News

In an article looking at the multi-city competition to land Amazon’s “HQ2,” Business Insider quoted Joe Cortright’s observation that it’s likely that Amazon has already selected its top prospects and is using the very public contest to strengthen its bargaining position.

Portland’s Willamette Week picked up on our analysis of the regressivity of flat vehicle registration fees in an article entitled “Vehicle Registration Fee Underlying $5.3 Billion Transportation Package Penalizes Thrifty Drivers.”


The Week Observed, October 27, 2017

What City Observatory did this week

1. Signs of the times. For most of the past few years, Portland–like other flourishing metro economies–has seen significant increases in apartment rents, as demand for urban living has outstripped local supply. There’s evidence that situation is changing–in the form of a bumper crop of “For Rent” signs in front of apartments all around the city. The construction of new apartments (there are now 19,000 in the development pipeline in the city) is starting to ease the supply crunch. Data from Zillow shows that rent inflation has fallen from the double-digits in 2016 to less than zero today. The “For Rent” signs foretell a likely decrease in rents in the months ahead, and also dispel two of the most common myths about the housing market.

2. The hamster wheel school of transportation policy. One of the most widely used metrics of transportation system performance is average travel speeds. But does going faster get us anywhere, and perhaps more importantly, make us happier? The evidence suggests not. We compared data on average travel speeds in metropolitan areas with survey data on how happy local citizens were with their local transportation system. Actually, people are happier in places where average speeds are lower. It turns out that faster moving places have more sprawl and longer average trips, and together, the negative effects of greater distance more the offset the illusory, hamster-wheel, advantage of moving faster.


Must read

We’re especially lucky this week; two of the sharpest writers on urban economics have long-form pieces on the plight of declining cities and regions.

1. Alex Baca on Reimagining the RustBelt. There’s been more than a little diagnosis of the ills of the Rust Belt, how they’ve infected the national body politic, and what might be done. After sitting through a long talking head session featuring economic development luminaries ranging from JD Vance to Joel Kotkin commenting on the release of a report called ““The New American Heartland: Renewing the Middle Class by Revitalizing Middle America,” Baca offers some trenchant and perceptive analysis. What’s being prescribed for struggling rustbelt cities is more of the same corporate urbanism–reducing regulation and cutting taxes, with hopes of attracting external investment–that’s failed them for decades. It may be dressed up in new rhetoric that suits the tenor of Trumpian times, but underneath its still the same flawed message. An important and well-argued read.

2. Ryan Avent on declining regions in The Economist. In contrast to the warmed over platitudes in the “Heartland” report skewered by Alex Baca, Ryan Avent offers a more nuanced and global perspective on the plight and prospects of declining regions. Throughout the developed world, the kind of middle-wage, routine manufacturing that clustered in relatively low cost smaller metros and rural areas has been in decline, dragging down surrounding economies. Ryan Avent takes a close look at the impact of globalization, the rise of urban, knowledge-based industries, and the slowing of migration within richer countries, all of which have contributed to declining regions.  The causes seem well defined; the solutions are less clear.

3. Smart phones are killing Americans, but we don’t know how many. Bloomberg BusinessWeek digs into the arcane data on traffic crashes to see what we know about the role that smartphones play in distracted driving. Official records report that only about 1 percent of fatalities involve smartphone distraction, But  there’s a tremendous blind spot in data collection. Few crash reporting systems have a convenient way to record whether a smartphone was being used at the time of crash. One state (Tennessee) that has a reporting system that specifically probes for evidence of distraction, including phone use; with just 2 percent of the nation’s population, it accounts for nearly 20 percent of distraction fatalities.  This is strong evidence that techno-distracted driving is greatly under-reported.  In light of all the triumphalism about technology and smart transportation, the lack of data about whether this technology contributes to distraction and crashes is a major paradox.

4. Writing in the New York Times, Alison Arieff chronicles the many ways we’ve made public spaces inhospitable to the public. In many places, like parks, squares, and streets, city officials have removed benches, or purposely engineered them to be uncomfortable. Too often, were sending a clear message that we don’t want people to linger in the public realm. Eliminating seating is emblematic of a whole class of policies and design choices, from single-family zoning to cul-de-sac street patterns, that limit or debase the prospects of being in public with others. Writ large, this trend undercuts the fundamental nature of community. Restoring the civic commons will hinge on a wide-ranging re-thinking of many of the aspects of place that we’ve taken for granted.

New Knowledge

Property tax levels on downtown office buildings.  Based in part on data from real estate analytics firm Yardi Matrix, Commercial Cafe has generated estimates of the average level of property taxes paid per square foot for office space in 40 of the nation’s largest central business districts. In most major markets, the cost of taxes runs to about $2,000 to $3,000 per thousand square feet, but there’s considerable variation. Unsurprisingly, the nation’s largest cities have the highest tax rates; New York’s tax burden works out to more than $16,000 per 1,000 square feet and about $10,000 per thousand square feet in Washington, DC.  Four other markets (Boston, Austin, Houston and Chicago) have property taxes of between $5,000 and $10,000 per thousand square feet. The Commercial Cafe data are great for benchmarking property taxes, but keep in mind that every city has its own distinct panoply of fees, taxes and tax breaks, so these numbers may not tell the whole picture on how much it costs for public sector charges associated with office space in each city.

In the News

Moody’s Economics in handicapping Austin as the leading contender to land Amazon’s HQ2 project, according to Business Insider which quotes Joe Cortright’s observation that it’s likely that the company has already narrowed its list of likely candidates to just a handful, and is chiefly using the very public beauty contest to improve its negotiating position.

The Week Observed, October 6, 2017

What City Observatory did this week

1. Subarus and Suburbans: Flat fee unfairness. Proposals to implement some form of road pricing, which would charge cars based on which roads they use, when, and how far they drive, have raised concerns that pricing may be unfair to low income households. But unexamined in such criticisms is whether the current way of paying for roads is fair. We take a close look at vehicle registration fees, one of the mainstays of current road finance schemes. In many states, registration fees or car tabs are a fixed dollar amount that doesn’t vary by vehicle type or amount of driving. We compare the incidence of these fixed fees on a two cars: a used, lightly driven Subaru, and a nearly new heavily driven Suburban. The Subaru pays a much higher fee as a percent of its value (20 times as much, in our example), and also pays almost 3 times as much per mile driven–even though the Suburban causes vastly more wear and tear on the road system. It’s a regressive, unfair and inefficient way to pay for roads.

2. Cities are pulling away economically.  A new study from the Federal Reserve Board looks at long term trends in unemployment between cities and rural areas. It finds that unemployment rates have fallen most in the largest metros (to less than 4 percent on average), while unemployment rates have bottomed out in smaller metros (4.5 percent) and rural areas (5 percent). This seems to be another indicator that US economic growth and opportunity are being driven by urban centered economic activity. Another development: unemployment rates for those with a high school diploma or less, which have been lower in rural areas than cities, have reversed.  Your chances of being employed if you have just a high school diploma are higher in large cities than in rural areas.


Must read

1. Trump’s tax reform and the Mortgage Interest Deduction. The sharp folks at Zillow have done the homework to estimate the effect of the Trump Administration’s changes to tax policy on the use of the mortgage interest deduction (MID). A taxpayer would need to buy an $800,000 home to make the mortgage interest deduction more valuable than simply applying a new doubled standard deduction. (Today, by Zillow’s calculation, the MID pays off for those who spend $300,000 or more). Overall, only about 5 percent of US homes are worth enough to qualify for MID benefits under the new plan.  In addition, the number of homes varies widely by market, and is much higher in expensive coastal markets.  In San Francisco, 59 percent of homes would still benefit from the mortgage interest deduction. In Pittsburgh, only 1 percent.  For full details on the calculation, and data for individual metro areas, see Zillow’s full analysis.

2. Meanwhile, at the other end of the housing subsidy spectrum, there are the long lines for those waiting for Section 8 vouchers. The Los Angeles Times reports that after 13 years of refusing to accept new applications for housing vouchers, the City of Los Angeles expects to get as many as 600,000 applications for housing assistance.  The bad news: the city expects to hand out only about 2,400 vouchers per year; Just 20,000 of the 600,000 will be accepted onto a waiting list, and they’ll likely have to wait several years just for a shot at the vouchers. There’s a stark contrast between the mortgage interest deduction (available automatically to all those who qualify; provided you have the income to buy a house) and Section 8, which is open only every several years, reaches a tiny fraction of those eligible, and requires long waits on a waiting list before aid becomes available.

3. How not to develop autonomous vehicles. Tony Dutzik of the Frontier Group and Henry Grabar of Slate describe the risks of a lasseiz faire approach to developing autonomous vehicles that would let automakers unilaterally control many of the aspects of AVs, including preemting state and local regulation. In theory, automated vehicles might effectively eliminate many crashes and deaths that are attributable to human error. But whether such promises can be realized, and whether they’ll create other problems, as yet unforeseen, depends heavily on the details of how they’re developed. As Dutzik points out, the history of relying on the industry to promote safety is fraught. Grabar worries that the broad discretion allotted to automakers by the AV legislation now moving through Congress is so vague that it could trump well-established local powers (like setting speed limits), and foreclose policies to need with likely new problems (i.e. whether owners of AV fleets can use the public right of way as free storage areas for unoccupied autonomous vehicles waiting for customers.

4. Its not the opportunity hoarding, its the shortage of opportunities. Richard Reeves book Dream HOarders has gotten a lot of mileage with the argument that the upper middle class has, through a combination of legacy admissions, exclusionary zoning and unpaid internships, “hoarded” the set of available opportunities for economic progress. Bloomberg’s Noah Smith pushes back, arguing that inequality owes as much or more to our national failure to create more opportunity. Smith’s point is that if we focus our attention mostly on rearranging access to a limited set of opportunities (like busting up the legacy college admission processes at elite schools), rather than investing in expanding the scale of opportunity (for example, more generous funding for the public universities that have been shown to materially accelerate inter-generational economic mobility), we’ve put ourselves into a zero sum game. Smith agrees that we should get rid of exclusionary zoning, but if we don’t expand opportunities, we won’t make much progress.

New Research

Walking away from the wire. Sociologists Stefanie DeLuca and Peter Rosenblatt report on the results of a program that helped low income residents of Baltimore move to mixed income suburbs with higher performing schools. Like several other cities, Baltimore has had a “moving to opportunity” style program that gives low income households in public housing the opportunity to move to higher income neighborhoods often in suburbs. One of the questions about such programs is whether households that initially make such moves persist in their new more diverse and affluent neighborhoods. DeLuca and Rosenblatt show that while subsequent moves take voucher recipients to neighborhoods that have a higher black and poor population, the vouchers represent a persistent change in location. A key feature of the Baltimore program was pre-move counseling and ongoing support services to help moving families adapt to their new neighborhoods.


The Week Observed, October 20, 2017

What City Observatory did this week

1. Now we are 3.  This week marks City Observatory’s third birthday. It’s been an exciting time to be engaged with cities. We take a few minutes to review what we’ve done over the past year, and set some goals for what we want to achieve in the next twelve months. Thanks, all, for following City Observatory!

2. Why is affordable housing so unaffordable? This week, a non-profit developer has broken ground on 82 badly needed new affordable apartments for low income families in Emeryville, across the bay from San Francisco. The bad news? The cost of building these apartments averages nearly $700,000.  At that price, its inconceivable that even region as wealthy as San Francisco can find the resources to build enough low and moderate housing to make a dent in its affordability problem. Seriously addressing affordability will require figuring out ways to lower costs and increase housing supply.

Estrella Vista (EAH Housing)

Must read

1. Gentrification and personal battles between artists in Boyle Heights. The predominantly Latino neighborhood of Boyle Heights in Los Angeles has been the visible epicenter of controversy over gentrification. Several stories have focused on the vandalism of art galleries, which are allegedly fueling displacement in the neighborhood. A new story from the Guardian—”Are white hipsters hijacking Anti-Gentrification in Boyle Heights”—reports on some of the deeply personal battles between artists in the community. According to the Guardian, Several prominent protesters have or had personal ties to targeted gallery owners and artists. Gallery sources also provided evidence that some individuals who sought their patronage later turned against them on social media. There’s no question that Boyle Heights is experiencing significant changes, but the Guardian makes it apparent that what’s happening their has been drawn into the spotlight by deeply charged personal animosities between groups of artists who question each others actions.

2. Diverging opportunities in big cities and small cities.  The Brookings Institution’s Mark Muro and Jacob Whiton take a look at the growing gap between the nation’s larger cities and its smaller ones.  Whether measured by income, job growth, or productivity, larger cities are increasingly pulling away from smaller ones. If it’s not a “winner take all” economy, it is as they say increasingly a “winner take most” economy. Some of this is due to largely inexorable forces of agglomeration–firms and workers are more innovative and productive when they’re together in larger, denser cities. But the negative effects on those in smaller and more rural places are amplified because of what Muro and Whiton call “threadbare” programs to cushion dislocation and help with adjustment.

3. Widening highways doesn’t reduce congestion. Writing in the Houston Chronicle, Allyn West reviews the latest plans from the Texas Department of Transportation to dump another several billion dollars into widening highways in the Houston area. Even TxDOT, it seems, has gotten the memo about the futility of trying to pave your way out of congestion. Their sales pitch for the expanded roadways is all about lowering expectations: they’re not claiming to solve or reduce congestion, but rather to “manage it.” Like urban highway builders everywhere, they’re fighting a losing battle against the fundamental law of road congestion:  adding unpriced road capacity simply stimulates more driving, and ultimately produces more traffic, longer delays and greater sprawl.

New Knowledge

Paying for Dirt.  Roughly speaking, the cost of building new housing can be divided into two parts:  the cost of building a structure (foundation, walls, roof, plumbing, wire, plaster, paint and fixtures, plus the labor to put it all in place) and the cost of the land that the building occupies. BuildZoom’s Issi Romem has painstakingly constructed estimates of how much these two different components cost in different metro areas around the country. Bottom line: the big differences among cities have little to do with differences in construction costs, and almost everything to do with land costs. The cost of construction among major metro areas varies via a factor of about two while the cost of land varies by a factor of about seven. This suggests that solving our affordable housing problem has much less to do with reducing the price of construction, and a lot more to do with reducing the price of land. The biggest factor is local land use laws which essentially mandate that each housing unit be bundled with a certain minimum amount of very scarce and expensive land. Paying for Dirt is a terrific resource, with detailed metro level estimates of the replacement cost of housing, and its relationship to local land prices. There’s even local detail showing the variations within metro areas; it turns out that even in “affordable” metro areas, the price of housing in urban centers tends to greatly exceed replacement costs, again suggesting that density constraints are limiting housing choice.

In the News

In an article entitled, “Much ado about downtown vacancies,” Downtown Los Angeles News quoted City Observatory’s Joe Cortright’s analysis how filtering in housing markets gradually transforms housing once built for the “luxury” end of the market into more affordable offerings.

CityLab’s examination of the subsidies being dangled to land Amazon’s HQ2 project, quotes Joe Cortright’s observation that it’s likely that the company has already narrowed its list of likely candidates to just a handful, and is chiefly using the very public beauty contest to improve its negotiating position.

The constancy of change in neighborhood populations

Neighborhoods are always changing; half of all renters move every two years.

There’s a subtle perceptual bias that underlies many of the stories about gentrification and neighborhood change. The canonical journalistic account of gentrification focuses on the observable fact that different people now live in a neighborhood than used to live there at some previous time. We seem to assume that most neighborhoods are stable and un-changing, and that absent some dramatic change, like gentrification, the people who lived in that neighborhood are the same ones who lived their a decade ago, and without such change, would be likely to live there a decade hence.  But constant population change or turnover is a regular feature of most neighborhoods, a fact confirmed by a recent study. To summarize the key takeaways:

  • The population of urban neighborhoods is always changing because moving is so common, especially for renters.
  • There’s little evidence that gentrification causes overall rates of moving to increase, either for homeowners or renters.
  • Homeowners don’t seem to be affected at all, and there’s no evidence that higher property taxes (or property tax breaks) influence moving decisions.
  • While involuntary moves for renters increase slightly in gentrified neighborhoods, there’s no significant change in total moves

In an article published in Urban Affairs Review, “Gentrification, Property Tax Limitation and Displacement,” Isaac William Martin and Keven Beck present their analysis of longitudinal data from the Panel Survey of Income Dynamics that track family moves over more than a decade.  An un-gated version of the paper is available here. One of the challenges of studying gentrification and neighborhood change is that most data simply provides snapshots of a neighborhood’s population at a given point in time, and provides little information about the comings and goings of different households. The PSID sample is unusual, in that in tracks households and individuals over a period of decades–this study uses data on the movement of household heads from 1987 through 2009. Martin and Beck were able to access confidential data that reports neighborhood location and enables them to identify the movement of households to different neighborhoods.

Richard Florida reviewed the Martin and Beck paper at City Lab and highlighted two of the study’s key findings:  that homeowners don’t seem to be displaced by gentrification and a subsidiary finding that property taxes (and tax breaks for homeowners) don’t seem to affect displacement.  These are both significant findings, but we want to step back and look at the broader picture this study paints of how neighborhoods change, because this study provides a useful context for understanding the complex dynamics of migration that are often left out of discussions of gentrification.

Change is a constant–Most renters have moved on after two years

One of the most striking findings from this study is how frequently renters move. These data show than in any given two-year period a majority (54 percent) of renter households had moved to a different neighborhood. The average tenure (length of time they’ve lived in their current residence) is on average 1.7 years. (Table 1).  Moving rates are lower (16 percent over two years) for homeowners, and average tenures are considerably longer (4.9 years, on average).  But the important thing to keep in mind is just how much volatility and turnover there is in neighborhood populations. Statistically, if about half of all renters move out of a neighborhood every two years, the probability than any current renter will live in that neighborhood ten years hence is about 3 percent (0.5 raised to the fifth power).

Many of the public discussions of gentrification assume that somehow, in the absence of gentrification, neighborhoods would somehow remain just the same, and that few or no residents would move away. This study shows reminds us that this isn’t true. In addition, we know that for poor neighborhoods that don’t see reductions in poverty rates, that population steadily declines. Our own study of poor neighborhoods shows that over 4 decades, the three-quarters of poor neighborhoods that didn’t rebound lost 40 percent of their population.

Most moves are voluntary

Unlike many other studies, the Martin and Beck paper is able to use survey data to try and discern the motivations for household moves. Broadly speaking they divide moves into “voluntary” and “involuntary” moves.  The PSID asks movers why they moved, and those that respond to this open-ended question with answers coded as “moved in response to outside events including being evicted, health reasons, divorce, joining the armed services, or other involuntary reasons” are treated as involuntary moves.As they note, the distinction isn’t always as sharp as one would like, and it may be that some respondents rationalize some involuntary moves as voluntary ones, but the self-reported data are clear:  among renters, voluntary moves dramatically outnumber involuntary ones.  About 54 percent of all renters moved in the last two years; about 13 percent of all renters reported an involuntary move.  That means that about 75 percent of all renter moves were voluntary and about 25 percent of renter moves were involuntary.  As Margery Turner and her colleagues at the Urban Institute have shown, moving to another neighborhood is often the way poor families get better access to jobs, better quality schools, safer neighborhoods and better housing.

Gentrification has no impact on overall renter moves, but is associated with a small increase in involuntary moves

One of the most important studies of gentrification is Lance Freeman’s 2005 paper “Displacement or Succession?: Residential Mobility in Gentrifying Neighborhoods” which found that gentrification had essentially no effect on the rate at which households moved out of gentrifying neighborhoods.  Martin and Beck replicate this finding for all moves by renter households, they write:

Consistent with Freeman’s findings, Model 2 indicates that we cannot be confident that the average effect of gentrification on the probability of moving out is different from zero.

Graphically, Martin and Beck’s findings are can be depicted as follows.  About 54 percent of all renters move within two years. According to Martin and Beck’s modeling, the probability that a person in a gentrifying neighborhood moves in two years is about 1.7 percentage points  greater than for the typical person (after controlling for individual household characteristics). That suggests that for a typical resident, their probability of moving in a gentrifying neighborhood is about 55.7 percent, but that estimate in not statistically significant.

When they look just at “involuntary” moves, however, they find that there is a statistically significant effect of gentrification on the probability of moving.  Specifically, they find that rental households in in gentrifying neighborhoods are about 2.6 percent points more likely to report an in “involuntary move” in the past two years than those who don’t live in gentrifying neighborhoods.  Its important to put that in context.  According to the paper, about 54% of all renters moved in the last two years, and about 13 percent of them experienced an “involuntary move.”  The estimate in the paper is that the effect of living in a gentrifying neighborhood is about a 2.6 percentage point increase in the likelihood of an “involuntary” move.  That means if the average renter has a 13 percent chance of an involuntary move, a renter in a gentrifying neighborhood has a 15.6 percent chance of such a move.  These results are shown below:

Here, the estimate that a renter makes an involuntary move from a gentrifying neighborhood  (+2.6 percentage points) is greater than the 95 percent confidence interval, which suggest that there is a statistically significant difference between the share of the population experiencing involuntary moves in gentrifying neighborhoods as compared to all neighborhoods.

What would that look like in a typical neighborhood?  If you have a neighborhood with 2,000 households (about 5,000 people, with about 2.5 persons per household), and about half are renters and half are homeowners, you would expect of the 1,000 renting households that about 130 households would experience an involuntary move over a two year period.  If that tract gentrified, you would expect an additional 26 households to experience an “involuntary move.” But you would also expect 530 total households to have moved out of the neighborhood in that time, for all reasons, voluntary and involuntary.  These data put the scale of the gentrification effect in perspective. Whether or not they gentrify, there’s going to be enormous change in the renter population of any given urban neighborhood.

Gentrification has no impact on homeowner moves

Martin and Beck find no evidence that homeowners in gentrifying neighobrhoods are more likely to move, either in the aggregate, or involuntarily.  They test a number of different models of the connection between gentrification and moving: none produce statistically significant correlations between gentrification and moving; in some cases (though statistically insignificant) the correlation is negative: gentrification is associated with fewer homeowners moving from a neighborhood.  Their conclusion: for homeowners, their study “produces no evidence of displacement from gentrifying neighborhoods.”

Property taxes (and tax breaks) seem to have no connection with homeowner movement from gentrifying neighborhoods

One popular argument is that gentrification pushes up property values and results in higher property taxes for homeowners, and that especially for households with a fixed income, the burden of higher property taxes is likely to force them to move. Martin and Beck look closely at this question, and examine how changes in property assessments and property taxes correlate with the probability of moving. They find that there’s no statistically significant link between property taxes and moving in gentrifying neighborhoods.  Several states and localities have enacted property tax or assessment limitations, in part with the objective of lessening the financial exposure of fixed income households to the burden of higher property taxes. Martin and Beck look at the relationship between such limits and the probability of moving, and find that such limits don’t seem to have any effect on whether homeowners move out of gentrifying neighborhoods or not.

While homeowners in gentrifying neighborhoods have to shoulder the burden of paying higher property taxes, its typically only because their homes have appreciated more in value. In most cities, property taxes are levied at a rate equal to about 1 to 2 percent of a property’s market value, so the wealth effect of property appreciation dwarfs the negative income effect of having to pay higher property taxes.

Urban renters are a highly mobile group. Most renting households are likely to have changed neighborhoods in the past two years. We observe the same overall level of movement out of neighborhoods whether they gentrify or not.  This study suggests that somewhat more of those moves would be involuntary rather than voluntary.



Now we are three!

Three  years  ago–on October 15th, 2014–we launched City Observatory, a data-driven voice on what makes for successful cities.  Since then, we’ve weighed in daily on a whole series of issues set in and around urban spaces. So today, we’re taking a few moments to celebrate our birthday, reflect back on the past year, and plot a course forward.

Flickr User: Blint.

Our fair city.

Once upon a time, it was all about “The City Beautiful.”  But today, our focus should turn, rightly, to “The City Just.”  Can we build communities that are not merely economically prosperous, but which are also diverse, inclusive and which foster widely shared opportunity?

We firmly believe that cities are the places of opportunity. Cities, when they work well, reduce the distance between people, and foster all kinds of interactions. Sometimes these interactions lead to friction and conflict, but many, if not most of these interactions are beneficial and serendipitous, with demonstrable social and economic benefits.

While many of the ills of the modern economy are most apparent in cities–the rich and poor live closer to one another cities than anywhere else, it’s also the case the the cure for these ills lies is strengthening the function of cities. Cities are full of contrasts and paradoxes. Even when some measures, like income inequality, signal the local manifestation of a national problem, what’s happening on the ground in cities, where people from different strata of society are living and working and playing closer to one another than they are in less dense and more economically segregated suburbs, is a cause for optimism.

Riven as our nation currently is by all manner of social, economic and political divides, cities are the place where we can invest in the civic commons–the kinds of public and quasi-public spaces that bring many different kinds of people togehter and foster the kind of “bridging” social capital that can knit our country back together.

For these reasons, we’re fundamentally optimistic about cities, and we’ll be exploring these themes in the coming months. We’ve long recognized, for example, that racial and economic segregation are serious detriments to cities realizing their potential. We’ll flip this perspective on its head by looking at the urban neighborhoods around the country, and in virtually every metro area, which exhibit high levels of economic and racial/ethnic integration.  They’re models of what we can to do built more inclusive places.

In a parallel vein, we’ll explore the strong common interests that cities, their businesses and their citizens have in pursuing mutually beneficial efforts to strengthen the civic realm. Its a tremendously encouraging time to be working in cities.   We hope you share that view and will continue to follow our work at City Observatory in the coming year.


Why is “affordable” housing so expensive to build?

The high price of affordable housing

It’s a problem that isn’t going away:  the so-called “affordable” housing we’re building in many cities–by which we mean publicly subsidized housing that’s dedicated to low and moderate income households–is so expensive to build that we’ll never be able to build enough of it to make a dent in the housing affordability problem.  The latest case in point is a new affordable housing development called Estrella Vista in Emeryville, California (abutting Oakland and just across the bay from San Francisco).  A non-profit housing developer just broke ground on a new mixed use building, about three-quarters of a mile from a local BART transit station, which will include 84 new apartments.  The project also houses about 7,000 square feet of retail space.  The total cost:  $64 million.  Assuming that 90 percent of the building is residential, that means that the cost per apartment is something approaching $700,000 per unit.  While the complex provides many amenities for its residents (proximity to the BART station, a Zen garden and sky deck), its inconceivable that we have enough resources in the public sector to build many such units.

Estrella Vista (EAH Housing)

Policy makers are beginning to realize this problem.  As we wrote earlier this year, California Governor Jerry Brown made that point his state budget. He’s said that he’s not putting any new state resources into subsidizing affordable housing until state and local governments figure out ways to bring the costs down. Last year, opposition from labor and environmental groups blocked the governors proposal to exempt affordable housing from some key regulatory requirements.  Brown had offered $400 million in additional state funds for affordable housing if that proposal was adopted. Brown took that money is off the table.

“We’ve got to bring down the cost structure of housing and not just find ways to subsidize it,” Brown said in is budget speech.

And the costs are substantial. In San Francisco, one of the largest all-affordable housing projects, 1950 Mission Street, clocks in at more than $600,000 per unit.  That number isn’t getting any lower: new units in that city’s Candlestick Point development will cost nearly $825,000 each, according to recent press reports. Brown’s point is that at that cost per unit, its simply beyond the fiscal reach of California or any state to be able to afford to build housing for all of the rent-burdened households. And while the problem is extreme in San Francisco, it crops up elsewhere.  In St. Paul, affordable housing–mostly one bedroom units– in a renovated downtown building cost $665,000 per unit.

More broadly, the case has been made that much publicly subsidized  affordable housing costs much more to build that market rate housing.  Private developers are able to build new multi-family housing at far lower cost. One local builder has constructed new one-bedroom apartments in Portland at cost of less than $100,000 a unit, albeit with fewer amenities and in less central locations that most publicly supported projects. In Portland, local private developer Rob Justus has proposed to build 300 apartments and sell them to the city for $100,000 each on a turn-key basis to be operated as affordable housing. Another possible cost savings measure: off-site construction. The University of California, Berkeley’s Terner Center has a report that explores the possibility for pre-fabricated, off-site construction to reduce construction costs.

Portland Mayor Wheeler voices the same concerns as California Governor Brown:

“We’ve added a lot of programs to affordable housing that may be socially desirable. But when the goal is to create the maximum number of new doors, we have to reduce costs and get more supply on the market as quickly as possible.”

In the Twin Cities, Myron Orfield has pointed out that the allocation of tax credits and the concentration of community development corporations in urban neighborhoods has tended to produce more housing in costly urban locations. Orfield also blames the high overhead costs of CDCs.

. . . central city development programs are inefficient, spending much more per unit of new affordable housing in the central cities than comparable housing costs in more affluent, opportunity-rich suburbs. Many of the leading developers working in the poorest parts of the region also pay their managers very high salaries. As a result, the funding system incentivizes higher cost projects in segregated neighborhoods over lower cost projects in integrated neighborhoods.

Perhaps the central problem of housing affordability is one of scale: the number of units that we’re able to provide is too small.  That’s true whether we’re talking about through Section 8 vouchers (that go to only about 1 in 5 eligible households), or through inclusionary zoning requirements (which provide only handfuls of units in most cities). The very high per unit construction costs of affordable housing only make the problem more vexing: the pressure to make any project that gets constructed as distinctive, amenity-rich and environmentally friendly as possible, means that the limited number of public dollars end up building fewer units. And too few units–scale–is the real problem here.

The combination of very limited public funds for affordable housing, even in the most prosperous and liberal cities, and the tendency for publicly subsidized housing to be nearly as costly as new, market rate housing, is a recipe for failure. Ultimately, we’ve got to find ways to make housing (whether built by the public sector or the private sector) less expensive.