Tax changes cut the Mortgage Interest Deduction sharply–but not for the rich

The 1.2 percent of households with incomes over $500,000 get 20 times as much tax relief from the mortgage interest deduction as the half of all households with incomes under $50,000.

Every year, the federal government spends about $250 billion on subsidized housing–not for the poor, mind you, but in the form of tax breaks for homeownership.

While a lot of attention gets focused on the mortgage interest deduction (MID), it’s just one of four major provisions in the tax code that subsidize homeownership. The others include the state and local tax deduction, the favorable capital gains treatment of housing, and the exclusion from income of the imputed rent that owners reap from living in their homes.

The Tax Cuts and Jobs Act of 2017 pares back the scope and benefits of the mortgage interest deduction. By raising the standard deduction and capping the size of mortgages on which taxpayers can deduct interest payments, Congress greatly reduced the number of households that are likely to claim the deduction, and also reduce their tax savings. The Joint Committee on Taxation estimates that the number of households that will claim the MID in 2018 will be 13.8 million, less than half the number who are claiming it in 2017.

These changes will reduce the size and cost of the MID. Total taxpayer savings from the MID are expected to fall from $59.9 billion in 2017 to just $25.0 billion in 2018.

But while the total cost of MID goes down, the benefits of MID shift even more heavily to the highest income households. The tabular presentation of this data is a little opaque, so we’ve converted it into a graphic format. For comparative purposes, we’ve shown the share of households in each taxable income category (from 2017). The chart below shows the distribution of households by income level (on the left hand side of the chart) with the distribution of the value of the mortgage interest deduction by income level in 2018 (on the right hand side of the chart).

Households by Income Level                                                              Mortgage Interest Deduction Tax Savings

It’s apparent that the benefits of the MID are heavily skewed to high income households, and are essentially non-existent for low and middle income Americans. Half of all households had incomes of less than $50,000 per year; they get about one percent of the tax benefits from the mortgage interest deduction. At the other end of the spectrum, the top 1.2 percent of households by income get 25 percent of all of the tax benefits from the mortgage interest deduction.  Thus, households with incomes of more than $500,000 per year get about 20 times more benefit from the mortgage interest deduction than the half of all households with incomes under $50,000.

The mortgage interest deduction has always been structured to benefit upper income Americans. Fundamentally, you had to be a homeowner to get any benefit, and as a group, the nation’s renters have lower incomes than homeowners, meaning they got nothing. Among those who could purchase a home, benefits were larger for the rich: The more money you borrowed and the higher your tax bracket, the bigger a tax benefit you got from MID.  The changes to the tax law approved last year skew the distribution of gains even further in favor of the rich. While about 50 percent of the benefits of the MID went  to households with incomes over $200,000 in 2017, roughly 60 percent of the benefits of MID go to such high income households in 2018.

Zillow’s data tracking prices of tens of millions of US homes adds further confirmation to the Dow of Cities

For some time, we’ve been talking about the Dow of Cities:  the notion that the price premium that urban homes command over suburban ones is a market indicator of the growing preference of Americans for city living. We’ve marshaled data from academic studies using decades of Census data, from an investment advisory service‘s tabulation of the Case-Shiller-Weiss home price index, from rental market statistics and today, we take a look at Zillow’s big data on US home price trends.

Zillow tracks data on home sales across the country, and has developed a sophisticated statistical model for estimating prices of virtually all US houses. They publish their estimates on a monthly basis, and also produce quarterly outlooks on the US housing market based on their statistical analyses.  We were particularly struck by a chart in the most recently quarterly outlook document.

They’ve broken down US home sales between urban, suburban and rural markets, and shown both the level of home prices (the left hand chart) and the change in home prices (the right hand chart).

Zillow’s caption pretty much says it all:  Urban homes (blue) are worth more than suburban homes (green) and their values are growing at a faster pace. Today, the typical urban home sells at an $80,000 premium to the typical suburban home. As recently as 2000, the typical suburban home commanded a higher price. And city homes are widening the gap. Though values fell pretty much across the board in the wake of the housing bubble, city homes have appreciated faster in recent years, most recently up 8.8% compared to a 6.0 percent increase for suburban homes.

What this large and growing price differential signals is that Americans attach an increasingly greater value to urban living than they did just five or fifteen years ago. The urban price differential is a measurable, market-driven indicator of the value we attach to urban living. And as we’ve argued at City Observatory, it’s also strong evidence that we’re facing a shortage of cities. A key part of the reason city prices are rising is that we’re not building housing fast enough in the urban locations that are in great demand. (It’s also a market message that there’s more demand for great urban neighborhoods, if we can figure out how to make more of them).

Earlier this month, City Observatory’s Joe Cortright was interviewed for HFO TV.  The interview focused on recent developments in Portland’s housing market, and explored the reasons behind the growth in rents in the middle part of this decade and the likely effects of housing policies, including the city’s inclusionary zoning requirements.

The full interview is 27 minutes long.

City Observatory’s Joe Cortright is one of the panelists at Chapman University’s April 5 conference “Will California Ever Figure Out How to House Itself“.  Here’s a summary of his remarks.

The housing crisis in California, as in many other states, manifests itself as a shortage and high price of housing, but is in fact symptomatic of a deeper and different shortage: a shortage of cities. The demand for urban living is growing, propelled by the urban-centric nature of knowledge-based industries and a growing consumer demand for dense, diverse, interesting walkable city neighborhoods. The supply of great urban spaces is constrained by locally controlled land use plans that make it difficult to build housing in the places where it is most highly valued—in dense urban settings.

The growing demand for cities

Cities make us more productive and innovative. They help workers get matched to job opportunities that best suit their interests and aptitudes. They help workers quickly acquire new skills and move to jobs or firms that can make best use of them (Hsieh & Moretti, 2015).

Cities offer huge advantages in consumption as well (Glaeser, Kolko, & Saiz, 2000). Consumers are spending a larger and larger fraction of their income on services. Higher income consumers, faced with a twenty-four hour day, place great store on close proximity to work and to a wide range of consumption amenities (and opportunities for social interaction). Cities are, in effect, an enormous labor-saving technology, reducing the amount of time consumers need to spend learning about, searching for, and traveling to places where they might consume services. In addition, by virtue of their size and diversity, cities offer a wider array of highly differentiated services enabling consumers to get just what they want. The same applies for social interactions, from everything from dating to “club goods” (Mills, 1972) group activities that require a minimum number of participants, whether its mah jong, ultimate Frisbee, square dancing, or dungeons and dragons.

There’s a growing demand for urban living. It’s driven by the preference of young workers for dense, diverse interesting cities. Census data show that well-educated young adults are increasingly likely to live in close-in urban neighborhoods. In 1980, 25 to 34 year olds were about 10 percent more likely than other residents of large metropolitan areas to choose to live with 3 miles of the center of the central business district. By 2000 they were 32 percent more likely than other residents, and by 2010 51 percent more likely (Cortright, 2014). Data show that the share of well-educated young adults living in the nation’s 50 largest cities increased 19 percent, nearly 5 times faster than the overall increase in city population between 2010 and 2016.

In part because of the preference of young workers for urban areas, economic activity is increasingly concentrating in the nation’s large metro areas, and within those metro areas, in city centers.

The growing demand for urban living is reflected in the relative price of housing within metropolitan areas. Since 2000, housing in city centers has increased in price much more rapidly than in suburbs (Edlund, Machado, & Sviatchi, 2015).

The growing demand for urban living, propelled by deep-seated shifts in consumer preferences, and reinforced and intensified by the growth of knowledge-based industries in cities is running into a relatively inelastic supply of urban housing. The rate of home construction in the center of metropolitan areas has fallen precipitously over the past several decades (Romem, 2018).

The housing affordability problem

A portion of the problem manifests itself as gentrification: the growing demand for urban living has led to disproportionate price increases in some previously low demand, low rent neighborhoods in urban areas. While gentrification can produce financial gains for long-time homeowners, rising rents may lead to less affordability, and the possibility of displacement for renters.

It is not housing in the solely in the sense of shelter, although homelessness is a rising problem in and of itself, but rather a shortage of places where the non-shelter components of housing, especially the access that housing provides to jobs, schools, social interaction, consumption and environmental amenities and economic opportunity.

Treating home ownership as a wealth creation strategy.

Underlying our housing affordability problem are stated national and local policies for treating home-ownership as a vehicle for wealth creation. The wealth-building performance of housing depends directly on an ever-increasing real price of housing, which has the net effect of transferring wealth to homeowners from home purchasers. As a result, rising real prices for real estate are a straightforward transfer of wealth of younger generations to older ones (Glaeser & Gyourko, 2018).

Federal tax policy subsidizes homeownership; local land use policy inflates and maintains the value of housing by restricting the construction of competitive supply, particularly in the most desirable locations.

For decades, and unlike many other high income countries such as Germany, Switzerland and Japan, the US has made the real appreciation of single family homes the principal means through which most families accumulate wealth. There’s an inherent contradiction between relying on ever increasing home values to promote wealth creation and achieving housing affordability.

Devolving land use control to the neighborhood level.

In California, cities and within cities, neighborhoods, have strong incentives to discourage the construction of additional housing. Additional housing likely increases the externalities they experience (traffic, pollution) and may raise the cost or diminish the quality of local public services. Individual jurisdictions face a prisoner’s dilemma: a city that allows apartments is likely to be overrun by the demand for them and end up bearing a disproportionate share of the costs of such development. As William Fischel has argued, homevoters dominate local government politics and decision-making and support measures that restrict housing supply (Fischel, 2001). Older voters and homeowners represent a disproportionate share of the electorate, especially in local elections. Municipal elections tend to have an electorate that is approximately a generation older than those who vote in national elections.

Establishing what is effectively a quasi-feudal property tax system.

Under Proposition 13 and its subsequent amendments, the amount of property taxes one pays hinges importantly on how long one has owned property in the state, and thanks to heritability provisions, whether one was fortune to be born to parents (or grandparents) who had the foresight and resources to become homeowners. The ability to inherit a favorable tax assessment costs local governments in excess of one billion dollars per year and also result in taxes on otherwise similar properties in a single neighborhood varying by a factor of up to four (Legislative Analyst, 2017). These provisions discriminate against newcomers, and given the state’s demographic change, effectively impose higher taxes on people of color. Proposition 13 also intensifies the incentives local governments face to exclude low cost housing because it can’t generate tax revenues sufficient to offset the costs of providing public services to incremental citizens.

Massive subsidies to high income home ownership through the federal and state tax systems.

The federal government has skewed the tax code to greatly favor homeownership, especially for higher income households. Interest on home mortgages has been fully deductible for households that itemize deductions, as are state and local property taxes (although both of these provisions have been scaled back by the recent tax reform act). Less noticed, but equally important, most households pay no capital gains taxes on the appreciation of the home they own, and in addition, the tax code excludes from income the value that households receive from the ability to live in homes rent free (imputed rental income). Together these tax provisions constitute a subsidy more than $250 billion annually to homeownership (Office of Tax Analysis, 2016).

Proposals

Recognize the national interest in encouraging the growth of dense, vibrant urban centers and in constructing more housing in these areas. There are many thoughtful proposals for addressing the problems of housing affordability in California (Metcalf, 2018), and the full range is beyond the scope of this paper. Broadly speaking, the solution should embrace four main concerns: expanding the supply of land available for urban development, shifting subsidies away from high income homeownership, fixing California’s property tax system and figuring out ways to make more intensive use of the existing housing stock.

1. Local land use laws that limit density in high demand areas are clearly implicated as a principal cause of affordability problems. The state should consider a range of measures that would liberalize the densification of residential development such as SB 827 (Wiener), which would allow by-right development of multi-family housing in transit rich areas (Wiener, 2018).
2. Our current federal and state tax systems subsidize homeownership, particularly for higher income households, and tend to drive up the cost of housing. Meanwhile, subsidies for renters are scant, reaching less than a quarter of technically eligible households. Capping homeownership benefits for higher income households would free up considerable revenues to subsidize rents and affordable housing construction. The tax savings might also support a system, such as individual development accounts, which would be tax-favored and for low income persons, government-subsidized vehicles for saving and wealth accumulation, without the need to invest in housing.
3. Proposition 13 and subsequent legislation have ossified the California housing market; homeowners have strong incentives not to downsize; local governments are strongly incentivized not to allow additional housing, especially apartments, and the system creates vast inequities between newcomers and long-time residents. The state should replace Proposition 13 with a universal housing credit; allow low income and senior populations to defer (with interest) property tax payments until sale or death, and restore the principal of assessing all properties equally, based on market value, regardless of the tenure of their owners.
4. There’s a growing mismatch between a housing stock composed of large, single family homes and the declining average household size in California. Promote innovative shared housing strategies. Ironically, the US has more housing, relative to the size of its population than it has ever had. We estimate that households in the US have more than 40 million empty bedrooms (defined as bedrooms in housing units where the number of bedrooms in the housing unit exceeds the number of persons residing in the housing unit. We should encourage shared housing services intentionally match people who have space in their homes (a key demographic being “house-rich, cash-poor” seniors who want to age in place) with people who need a home (individuals and families either working or with stable means to pay reasonable rents(Sandoval & Huerta Nino, 2015). Making better use of our existing housing supply would reduce demand for housing and help make rents more affordable.

References

Cortright, J. (2014). The Young and Restless and the Nation’s Cities. Portland, OR: City Observatory. Retrieved from http://cityobservatory.org/ynr/

Edlund, L., Machado, C., & Sviatchi, M. (2015). Bright Minds, Big Rent: Gentrification and the Rising Returns to Skill. National Bureau of Economic Research. Retrieved from http://www.nber.org/papers/w21729

Fischel, W. A. (2001). The homevoter hypothesis: How home values influence local government taxation, school finance, and land-use policies.

Glaeser, E., & Gyourko, J. (2018). The economic implications of housing supply. Journal of Economic Perspectives, 32(1), 3–30.

Glaeser, E., Kolko, J., & Saiz, A. (2000). Consumer City. NBER Working Paper, 7790.

Hsieh, C.-T., & Moretti, E. (2015). Why Do Cities Matter? Local Growth and Aggregate Growth. National Bureau of Economic Research. Retrieved from http://www.nber.org/papers/w21154

Legislative Analyst. (2017). The property tax inheritance exclusion (p. 15). Sacramento, CA: California Legislature. Retrieved from http://www.lao.ca.gov/reports/2017/3706/property-tax-inheritance-exclusion-100917.pdf?pdf=3706

Metcalf, G. (2018). Sand Castles Before the Tide? Affordable Housing in Expensive Cities. Journal of Economic Perspectives, 32(1), 59–80.

Mills, E. S. (1972). Urban Economics. Glenview, IL: Scott, Foresman & Company.

Office of Tax Analysis. (2016). Tax Expenditures – FY 2018 (p. 37). Washington, DC: U.S. Department of the Treasury. Retrieved from https://www.treasury.gov/resource-center/tax-policy/Documents/Tax-Expenditures-FY2018.pdf

Romem, I. (2018, February 1). America’s New Metropolitan Landscape: Pockets Of Dense Construction In A Dormant Suburban Interior. Retrieved March 6, 2018, from https://www.linkedin.com/pulse/americas-new-metropolitan-landscape-pockets-dense-dormant-issi-romem

Sandoval, G., & Huerta Nino, R. (2015). PROMOTING FAMILY ECONOMIC SECURITY in the San Francisco Bay Area Region (p. 45). Insight Center for Community Economic Development.

Wiener, S. (2018, January 4). California Needs a Housing-First Agenda: My 2018 Housing Package. Retrieved March 6, 2018, from https://artplusmarketing.com/california-needs-a-housing-first-agenda-my-2018-housing-package-1b6fe95e41da

Is the “dream” of homeownership really just a massive, intergenerational wealth transfer?  Recently, that’s just how it has worked out.

The takeaways:

• Homeownership is a gerontopoly. Most housing wealth is held by older Americans.
• Inequality in the US is increasingly intergenerational. The old get richer and the young get poorer.
• Most of the growth in intergenerational equality is fueled by home ownership. More older Americans own homes, own more valuable homes, and owe less debt on these homes.
• Homeownership isn’t making younger generations wealthier. Rising real home prices effect a transfer of wealth from younger generations to older ones.

Housing and wealth inequality

The growth in inequality in the US has been much studied. Over the past several decades, the distribution of income in has become much more skewed, with nearly all of the increases in real income accruing to the highest income households. Not only has income become more unequally distributed, so too has wealth.

As Matthew Rognlie showed virtually all of the increase in wealth inequality in the United States in the past four decades is accounted for by the increase in the share of capital in housing. Mian and Sufi plotted the ratio of the amount of home equity owned by the highest income quintile compared to the middle quintile of the US population. In the 1990s, a household in the highest income quintile had about 5 times as much housing equity as the average, middle quintile. By 2010, this difference had nearly doubled: to 9 times as much housing equity. Because of the volatility of home prices, and the systematic way in which financial markets favor the wealthy, homeownership actually contributes to increased inequality. A recent study by the Federal Reserve Bank of New York shows that since the housing bubble, a much higher share of homeowner equity has been accumulated by households with the highest credit scores.

The Intergenerational Wealth Gap

There’s a strong generational component to inequality. Over the past several decades, older Americans have done relatively well, while younger Americans have struggled. Some of the most comprehensive data on wealth holdings by American households comes from the Federal Reserve Board’s triennial Survey of Consumer Finances. While most other statistics focus on measures of income, the Fed survey asks a representative sample of homeowners about home ownership, car ownership, financial holdings, and all kinds of debt from credit cards and student loans to home mortgages. These data are broken down by a number of demographic categories, including age.

This figure shows the median net worth of US households by the age of the head of household in 1989 and in 2016. Data are expressed in inflation-adjusted 2016 dollars. Since 1989, the all of the net increase in wealth has been experienced by households now aged 65 and older.  The wealth of those aged 55 to 64 is essentially the same is in 1989 (up just 3 percent); those under 55 are decidedly poorer; the average wealth of those 35 to 44 is 43 percent less than in 1989, and for those 45 to 54, is 33 percent less than in 1989.

As the steeply stair-stepped nature of the red columns indicates, wealth is much more highly correlated with age now than in 1989.  It used to be that households in their prime to late working years (ages 45 to 64) had higher net worth than those over 65 (just under $200,000 in 1989 for those 45 to 64, vs. less than 150,000 for older adults). Today, the oldest Americans (75 plus) have a median net worth more of $265,000; more than double that of those in their prime working years (45 to 54) of $124,000. Homeownership and Age Inequality

For most American households, their largest asset is the home that they own. It’s little surprise therefore that change in age-related income inequality are mirrored in patterns of home equity. Today, a smaller fraction of young households owns their homes than in 1989; and as a group, they consequently have much less home equity per household. Meanwhile, homeownership rates have actually increased among older households, and in addition, since fewer of them have significant mortgage debt, and have on average owned homes for several decades, have much more equity.

This chart shows the average (mean) level of homeowner equity for households, by age of household head. Again, data are expressed in constant 2016 dollars. We’ve estimated mean equity by multiplying the homeownership rate for each age group by the mean level of home equity for homeowners in each group (the difference between home value and outstanding mortgage debt on principal residences). As a result, these data reflect the combined effects of lower homeownership among younger households, as well as accumulated equity by older homeowners.

Overall, these data mirror the patterns of change in overall wealth.  Those 65 and older have recorded substantial gains and the oldest households now have the greatest amounts of average housing wealth.  Those under 55 have noticeably less housing wealth than did similarly aged households in 1989. In short, younger adults have seen their housing equity shrink precipitously, while older Americans have experienced a rapid increase in their housing equity. Housing wealth in the US has become increasingly concentrated in the hands of the nation’s oldest households. Today, fully two-thirds of all equity in owner-occupied housing is held by families headed per persons 55 and older.

As we’ve pointed out at City Observatory, there’s an inherent contradiction between the goals of promoting housing affordability and using homeownership as a wealth building strategy. Affordability requires that housing be stable in price; a good investment needs to appreciate. If housing is a great investment, its because its becoming less affordable.  If housing stays affordable, it is, by definition, not an investment that generates gains.

When housing appreciates it does create wealth––for those who already own it. But that wealth comes from somewhere. Fundamentally, with a large, and long-lived housing stock, homeownership is mostly about one generation buying an asset from a previous generation. Economist Ed Glaeser explains this in a recent article in the Journal of Economic Perspectives.

What City Observatory did this week

1. The Cappuccino Congestion Index. Media reports regularly regurgitate the largely phony claims about how traffic congestion costs travelers untold billions of dollars in wasted time. To illustrate how misleading these fictitious numbers are, we’ve used the same methodology and actual data to compute the value of time lost standing in line waiting to get coffee from your local barista. Just like roadways, your coffee shop is subject to peak demand, and when everyone else wants their caffeine fix at the same time, you can expect to queue up for yours. Just as Starbucks and its local competitors don’t find it economical to expand their retail footprint and hire enough staff so that wait times go to zero (your coffee would be too expensive or their business would be unprofitable) it makes no sense to try to build enough roads so that there’s no delay. Ponder that the next time you’re waiting for your doppio macchiato.

2. What’s to be done about California’s housing crisis?  City Observatory’s Joe Cortright was one of the panelists at Chapman University’s April 5 conference “Will California Ever Figure Out How to House Itself“. The housing crisis in California, as in many other states, manifests itself as a shortage and high price of housing, but is in fact symptomatic of a deeper and different shortage: a shortage of cities. The demand for urban living is growing, propelled by the urban-centric nature of knowledge-based industries and a growing consumer demand for dense, diverse, interesting walkable city neighborhoods. The supply of great urban spaces is constrained by locally controlled land use plans that make it difficult to build housing in the places where it is most highly valued—in dense urban setting

Must read

1. Integration now, Integration forever. We don’t often point to the musings of New York Times columnist David Brooks, but this week, he grabbed our attention with a compelling argument for a new national commitment to promoting residential integration. It’s a term, Brooks, notes that’s fallen from fashion, but deserves new attention.

If we’re going to kick-start another push toward racial integration — which is more or less a moral necessity — maybe the place to start is in the neighborhoods. As the work of the Stanford economist Raj Chetty has emphasized, poverty is very place-oriented. It is the granular conditions of each specific neighborhood that influence whether the residents have a high or low chance of rising and succeeding.  A renewed integration agenda would mean building public housing in low poverty areas, eliminating exclusionary zoning laws, and yes, accepting gentrification (a recent U.C.L.A. study finds that gentrification is increasing diversity in District of Columbia public schools).

2. What really causes gentrification: single family zoning. Washington DC is having public hearings on its comprehensive plan, and it’s getting some strong and thoughtful testimony from the YIMBY movement addressing some of the big and largely unexamined assumptions on which the city’s (and most cities) plan is based. One commenter makes a strong connection between gentrification and single family zoning. The most attractive and valuable neighborhoods in Washington flatly ban new apartments, with the result that little new housing is built there, and prices go even higher. With few or no alternatives, the demand that might otherwise be accommodated in these places then gets displaced to poorer neighborhoods, where zoning is more permissive (and/or the neighbors have less political clout). Here’s a snippet of testimony from Bob Ward, from Greater Greater Washington’s write up of the hearing:

When new housing is blocked in places where people want to live, like in Ward 3, home buyers and renters will look elsewhere, and they have. We should acknowledge that the walls of privilege around places like Cleveland Park contribute to displacement elsewhere in the city.  A growing city that protects wealthy enclaves and forces growth to other parts of the city is inequitable. . . .  code words like stability, conservation, neighborhood character, when used in defense of the privileged, should be scrutinized that they are not just smokescreens for inequity.

3. New York blows a chance to lead on congestion pricing. New York, which seemed to finally be on the verge of adopting congestion pricing, decided instead that a poorly thought out tax increase on for-hire vehicles was actually the idea whose time had come. Taxis, Uber and Lyft vehicles will pay a surcharge on trips in lower Manhattan, with proceeds to go to transit, but other privately owned vehicles (whether moving or just tying up some of the world’s most valuable real estate) will not. As ZipCar founder Robin Chase observed, this has wide implications not just for New York, but for the rest of the country.

Congestion pricing was supposed to be “an idea whose time has come” for New York City. But in a budget deal announced on Friday in Albany, state leaders not only punted on the policy but also may have undermined its viability in New York and across the country for a generation.

The surcharge is structured in such a way that its unlikely to blunt the increasing number of ride-hailed vehicles that are slowing car traffic, and crippling the efficiency and ridership of the bus system. Look for things to get worse before they get better in New York.

New knowledge

The healthiness of walkable urban neighborhoods. There are a lot of studies that have looked at the connection between urbanity, walkability, green space and health outcomes. It’s a bit much to digest, but Kaid Benfield has a nice survey of the recent literature at Placemakers.  Some key findings: Density is associated with lower body fat and less obesity.  Likewise, people who live in more walkable neighborhoods tend to have lower rates of mortality.  But its not all rosy:  those living in urban environments are at greater risk for asthma than rural residents. There’s also some interesting findings about the importance of urban green space. A study from London shows that walking in public parks produces measurably better health than walking the same distance on heavily trafficked streets. Other studies look at the role of noise on health. This is a readable and wide-ranging survey of the recent scientific work.

In the news

The Asheville Citizen-Times published an Earth Day Op-Ed citing City Observatory’s “Less in Common” research on the decline in social trust and civic interaction.

What City Observatory did this week

1. The Dow of Cities. The most predictable feature of any media business report is a recitation of the daily movements of major stock indices, like the Dow Jones Industrial Average. The Dow is meant to use changes in prices to concisely convey the market’s sentiments about the outlook for the economy. At City Obsrervatory, we’ve suggested that the relative price that people are willing to pay for city homes compared to suburban ones functions as a kind of “Dow of Cities.” And based on home price data compiled by Fitch Investment Advisers, this market indicator is up sharply: prices for city homes have risen about 50 percent faster than for suburban homes since 2000, reflecting a growing demand for urban living–and a growing shortage of cities.

2. The Ben and Jerry’s crash course in transportation economics. Tuesday marked Ben and Jerry’s annual free cone day, where they give ice cream cones away to anyone who comes to one of their stores. People line up around the block to get “free” ice cream: exactly the way that we get lines of cars at rush hour, and for exactly the same reason:  when something is under-priced, it is over-used, and in effect we end up rationing it inefficiently by patience, rather than price. As long as highway engineers pretend that every day is free cone day on urban roads, we’ll continue to have regular traffic congestion.

3. A critical look at suburban triumphalism. A lot has been made in the media lately about somewhat faster rates of population growth in suburban counties, and a slowdown of population growth in denser counties. Some are ready to proclaim the era of expanding urbanism over. We’re not: a close look at the data shows that city growth has accelerated compared to the last decade, and continues to be powered by the increasing movement of talented young workers to city centers and close-in neighborhoods. The growing price premium for urban housing shows just how robust that demand is, and why we need more housing, and more great urban neighborhoods to address our national shortage of cities.

Must read

1. Measuring Social Capital. Two decades ago, in his book “Bowling Alone,” Robert Putnam popularized the idea of social capital, the notion that widely shared norms of reciprocity and networks of loose ties underpin equity and economic success. The term has been easier to describe than to measure. A new report from the office of US Senator Mike Lee of Utah presents a set of state and county indicators intended to measure variations in regional social capital. The state measures are based on a rich array of survey data, mostly from the US census that looks at everything from family structure (single-parent households) and children’s television watching habits, to rates of voting and volunteering and the numbers of non-profit organizations in a community.  Similar to Putnam’s original results, this index shows the strongest social capital in the center of the country, in a belt running from Wisconsin to Utah.

2. Would auctioning off higher density pay to fix New York’s transit problem? New York City faces two big problems: a chronic housing affordability crisis and an over-loaded and under-funded transit system. In The Atlantic, Reihan Salam sketches out a proposal to tackle both problems at once by having the city auction off the right to build to much higher densities. In “transit growth zones,” builders could pay a per square foot fee to build buildings taller than currently allowed by zoning. The author of the scheme, Manhattan Institute’s Alex Armlovich, estimates that it could produce more than 400,000 units of housing over a decade and and more than $50 billion to support subway costs. Salam also argues that more housing near transit would reduce displacement pressure in existing neighborhoods. The politics of such a proposal would be formidable, but like the debate around California’s SB 827, it’s the kind of game-changing discussion that’s worth having.

3. Rents are dropping in New York. Bloomberg reports that in all five boroughs, year-over-year median rents have fallen, by about 3.8 percent in Manhattan and by more than 6 percent in Brooklyn and Queens. The reason, per Bloomberg:

Property owners across the three boroughs are contending with an avalanche of new apartment supply, giving them no choice but to cut prices.

It’s not a sudden, spontaneous decline in landlord greed, it’s about supply and demand. Because prospective renters have choices (thanks to a growing supply of apartments), they have more ability to negotiate with landlords.

New knowledge

The counter-intuitive effects of “ban the box.” Many cities and states have adopted “ban the box” laws that prohibit employers from asking about whether prospective job applicants have ever been convicted of a crime. A National Bureau of Economic Research working paper  looks at the effects of these requirements on crime rates. While “ban the box” seems like a simple and fair way of blocking discrimination, this evidence suggests that in the absence of direct information about prior criminal records, employers revert to other kinds of discrimination. The study finds that in jurisdictions that adopted ban the box, property crime rates for Hispanic offenders increased, while property crime rates for whites tended to decline.  This evidence is consistent with employers discriminating against people of color in response to ban the box laws.

Do Ban the Box Laws Increase Crime? Joseph J. Sabia, Taylor Mackay, Thanh Tam Nguyen, Dhaval M. Dave,  NBER Working Paper No. 24381

In the news

The Aspen Institute called our commentary “Ben and Jerry’s Crash Course on Transportation Economics” one of the five best ideas of the day on April 12.

Reihan Salam quotes City Observatory’s Joe Cortright in his article on an innovative idea for tackling New York City’s housing and transportation problems published in The Atlantic.

What City Observatory did this week

1. Housing reparations for Northeast Portland. The Oregon Department of Transportation is selling its plan to spend half a billion dollars widening a stretch of freeway in Portland by claiming it will help knit together the communities divided when the freeway was built in the 1960s, including the city’s historic African-American neighborhoods. At the time, ODOT demolished more than 300 homes to build the freeway–but didn’t replace them. We think a better way to repair the damage done to the neighborhood would be to rebuild those homes. At today’s prices they’d be worth about $140 million.

2.  The Portland Housing Market.

City Observatory’s Joe Cortright is interviewed by HFO TV on the current state of the Portland housing market, the outlook for housing affordability and the impacts of the city’s inclusionary zoning policies.

Must read

1. The red/blue map, reimagined. We’re suckers for a good map. And while its part of our national iconography, we’ve never been happy with the traditional red/blue state boundary chloropleths that are used to convey the nation’s political divisions. The maps exaggerate the weight of sparsely populated rural areas, and convey the impression that red outweighs blue overall (recall that in the 2016 election Hillary Clinton actually got xx million more votes than Republican Donald Trump). This new map from Kenneth Field replaces the blocky state choropleth with a very finely grained dot-density map that shows much greater nuance: emphasizing the concentration of population in metro areas, showing the patterns with those metro areas, and clearly conveying the weight of political sentiment.

2. A modest proposal to reduce segregation:  Last week marked the 50th Anniversary of the Fair Housing Act, and produced a lot of reflection on how little progress has been made to reduce the profound racial and economic divisions that mark American housing. UCLA law professor Johnathan Zasloff suggests that maybe its time for a more aggressive, straightforward economic approach to promoting integration:  paying people to integrate segregated neighborhoods. He suggests a system of modest grants for down payments or several months of rent (say $10,000 or so) for people who moved into otherwise segregated neighborhoods (i.e. whites moving into predominantly black neighborhoods or blacks moving into predominantly white neighborhoods). Zasloff and his colleagues estimate that a program for metropolitan Buffalo, New York, would require 10,400 pro-integrative moves to reduce the dissimilarity index below .60, at a cost of roughly $285 million. They propose to phase out the subsidies as the dissimilarity index declines in a city.

3. The growth of ride-hailing in New York City.  Todd Schneider taps New York’s on line trove of for-hire trip data to track the industry’s growth. Trips taken via Uber now outnumber yellow taxi trips in New York City. More strikingly, the total number of for hire trips (yellow taxi plus ridehailing) has grown 40 percent since 2014, from 15 million monthly trips to more than 25 million trips.  Unconstrained by the medallion system that limits the number of yellow taxis, ride-hailing companies continue to add vehicles in the city, further slowing traffic. It’s doubtful that the newly enacted surcharge on these rides will blunt their growth, but we’ll follow these numbers closely in the months ahead.

New knowledge

Soda taxes reduce sugary soda consumption: According to Consumer Reports new study from Drexel University looks at the effects of Philadelphia’s 1.5 cents per ounce sugary beverage tax. Pre- and post-tax surveys of Philadelphia residents show a 38 percent decline in the consumption of soda; meanwhile surveys of residents in surrounding cities with no tax show no change. These data show that the tax is effective in nudging consumers to change their behavior–which also explains why they’re being fought tooth and nail by soda companies.

In the news

City Observatory’s post debunking the latest round of suburban triumphalism was the weekend’s most read article on The Overhead Wire.

What City Observatory did this week

1. Gerontopoly:  Is homeownership a sure route to building wealth? It has been in the US, but increasingly, its only working for older generations. Homeowners 55 and older now hold most  of all of equity in owner-occupied homes in the US. Younger adults have only about half as much housing wealth as their parents did when they were their age. As we’ve noted, rising real home prices represent a straight transfer of wealth from younger generations to older ones, which is exactly what appears to be happening in the US.

2. The mortgage interest deduction:  smaller, but now even more unfair. The recently passed Tax Cut and Jobs Act pares back the eligibility for the mortgage interest deduction, and will reduce its cost to the federal treasury by almost half. But the benefits of the MID now go even more to the highest income Americans. The top 1.2 percent of households (with incomes of more than $500,000) will get a quarter of the savings from the MID, while the bottom 50 percent of households (those with incomes less than $50,000) will get one percent of the benefits of MID. The tax code–which remains the biggest source of funding to subsidize housing costs–is even more skewed to high income households than before.

3. The Dow of Cities: Big Data edition. Zillow gathers data from home sales across the nation and produces detailed monthly estimates of house prices for millions of homes. One of the findings in their latest quarterly housing market report confirms a trend we’ve been following at City Observatory: housing in cities is commanding a large and growing premium over housing in the suburbs.  The average city home, which sold at a slight discount to the typical suburban home in 2000, now fetches a price more than $80,000 greater. This is clear evidence of the growing value that Americans put on urban living, and a signal that we’re facing a shortage of cities.

Must read

1. Don’t ignore class when addressing racial gaps. Harvard’s William Julius Wilson has a review and commentary of the latest Raj Chetty/Nate Hendren Equality of Opportunity Project research on the persistence of racial gaps in intergenerational economic mobility. He says the importance of this research can’t be overstated, and that it should change our views of how the word works.  Wilson stresses the finding that the presence of fathers (and not just one’s own father) in a neighborhood seems to be strongly correlated with intergenerational mobility, especially for black boys. But the problem is that fewer than 5 percent of black children live in the kind of low poverty, father-rich neighborhoods that are associated with economic mobility. As a result, we need to pay much more attention to the combined effect of race and class as they interact: black households are now more segregated by income that white or Latino households, meaning the effects of concentrated poverty bear more heavily on black families.

2. All the world’s (big) cities. We tend to be a bit US-centric at City Observatory, so we welcome the opportunity to present a more global picture of urbanization around the world.  Duncan Smith of CityGeographics has produced a World City Populations Interactive Map which shows population estimates for the world’s largest cities from 1950 through (predicted)2030 levels. Its fascinating to see how many big cities they are, and how they are clustered in different continents.

3. Neighborhood and school segregation in Washington. The Brookings Institution has an interesting analysis of racial and economic patterns of school attendance and neighborhood population for the District of Columbia. It shows that DC is still very segregated, and that a combination of charter schools (in mostly African-Amercan neighborhoods) and private schools (in mostly White neighborhoods) tend to recapitulate historic patterns of segregation. Integration seems to be most pronounced in those neighborhoods in the middle of the district; as the report puts it: “socioeconomically diverse schools cluster along the rich-poor, black-white dividing line in the nation’s capital.”

This finding points up the close connection between neighborhood integration and school integration It’s difficult to establish integrated schools in segregated neighborhoods (see Ward 3 and Ward 8).  The more mixed the demographics of the neighborhood, the more likely schools are to be integrated (Wards 1, 4 and 5).

In the news

Next City cites our analysis showing that peak hour car commuters have higher incomes than those who travel off-peak, use transit, or bike or walk to work.

The Dow Jones Industrial may be down, but the Dow of Cities is rising

The daily business news is obsessed with the price of stocks. Widely reported indicators like the Dow Jones Industrial average gauge the overall health of the US economy by how much, on any given day (or hour, or minute) investors are willing to pay for a bundle of stocks that represent the ownership of some of the nation’s biggest businesses. After peaking in January, investors have become decidedly skittish and pessimistic about the US economy, as evidenced by wild daily gyrations and an overall fall of almost 10 percent the Dow Jones Industrials (DJI).

At City Observatory, we’ve applied the same idea–a broad market index of prices–to America’s cities. We’ve developed an indicator we call “The Dow of Cities.”  Like the DJI, we look at the performance of a bundle of asset prices, in this case, the market values of homes in the nation’s densest urban neighborhoods.  And because we’re focused on cities, we compare how prices for houses in cities compare with the price of houses in the more outlying portions of metro areas.

Here’s the simple number:  since 2000, home prices in city centers have outperformed those in suburbs by 50 percent. In graphic terms, it looks like this:

The data were complied by Fitch–the investment rating agency, in a report released with the announcement that “U.S. Demand Pendulum Swinging Back to City Centers.”  What the data show is that the dark blue line–which represents housing in city centers–is consistently outpacing the other lines–representing increasingly suburban rings of housing. The premium that the most urban houses command over the rest of the metro housing stock reflects the growing market value Americans attach to urban living.

If you care about cities, and you’re looking for definitive evidence of the verdict of the market on urbanism—this is it.  But we are also resigned to the fact that we are geeks, and stuff that gets our blood-racing leaves most people cold.  So I’m groping for an analogy:  the most convenient one is to the stock market.

Image a CNN business reporter saying:

“In the market today, city centers were up strongly to a new high”

Or a Wall Street Journal headline

“A bull market for city centers”

That’s the news here. Just as with private companies this price index is a great indicator of market performance. Imagine for a moment if you were CEO of Widgets, Inc, a publicly traded company. Every day, you’d be getting feedback from the market on how well you were doing, and on investor’s expectations for your company’s future.  If your stock price went up, it would be a good indication that you were doing better, and that expectations were rising for future performance. Especially if you had a sustained rise in your stock price, and if your company were regularly outperforming  both other companies in the widget industry, and the overall stock market. The reason the investment world is gaga over Warren Buffet is pretty much because he’s been able to do just that with the portfolio of companies he’s assembled under the Berkshire-Hathaway banner.

Wouldn’t it be great if we had the same kind of clear cut financial market style indicator on the health and prospects of our nation’s center cities? Wouldn’t it be useful if we could show in a stark and quantitative way how city centers are performing relative to suburbs? That, in essence, is what the Fitch data shows. Fitch’s analysts looked at 25 years worth of zip code level home price data in 50 of the nation’s largest metropolitan areas to track how well city centers performed compared to surrounding neighborhoods and suburbs. They divided zip codes within metropolitan areas into four groups based on their proximity to the city center.

You can’t literally buy stock in a city, but buying a house is the closest thing imaginable.  The price a buyer is willing to pay for a home in a particular city or neighborhood is a reflection both of the current value of that location, and the buyer’s expectations of the future character and performance  of the neighborhood and city.  Add up all the home values in the city, and you’ve got an indicator of the market for the city as a whole.

This Fitch chart is, in effect, a kind of Dow Jones Index for the performance of the nation’s center cities.  It clearly shows that over the course of the last housing cycle—beginning before the big run up in housing prices, but then continuing through the housing bubble, and growing during the bust and recovery, is an ever wider edge of city center housing prices compared to more suburban, out-lying locations.  And this isn’t a short term aberration or a recession artifact. The Fitch data show the trend emerging in the late 1990s, and growing steadily over time.

While there’s a growing recognition that cities are back, in some quarters there’s denial.  The truly great thing about this measure its it definitively puts the lie to the claims by perennial city nay-sayers like Joel Kotkin that the overall growth or size of suburbs is somehow a manifestation of their revealed economic superiority. In economic terms, bigger doesn’t necessarily mean better.  In the economic world, market prices, and particularly changes in relative market prices are the best indicator of what’s hot and what’s not.  The new Fitch analysis make it abundantly clear that cities are hot, and suburbs are not.

The reason of course is that housing demand can (and is) changing much faster than supply—which is why prices are rising so much. Rising prices are both a positive indicator of the value consumers place on city center living, and a reminder that as we’ve said many times at City Observatory, we’re experiencing a shortage of cities. And the rising relative prices for city locations are the market’s way of saying “we want more housing in cities” and “we want more cities.” While the strength in the housing sector has been an urban focused boom in new rental apartments, the fact is that supply isn’t growing rapidly enough.  We aren’t creating new San Franciscos and new dense, walkable, transit-served neighborhoods in other cities as fast as the demand for urban living is increasing—and that means that prices are continuing to rise.