The Mortgage Interest Deduction: Smaller, but even more unfair

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
Source: Joint Commitee on Taxation (data); City Observatory

 

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.

 

Dow of Cities: Big data on the urban price premium

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).

 

City as theme park

There’s no critique more cutting than saying that development is turning an urban neighborhood into a theme park.

 

The irony of course, is that cities like Dubrovnik and Venice represent a profoundly obsolete, pre-industrial technology.  They were built without machines, without computers, designed for walking and and most animal powered travel.  They provide a degree of walkability, density and human-scale–and freedom from cars–that’s simply not available anywhere else.

 

In 1990, some colleagues at the University of Washington invited Patrizio Bianchi, a professor of economics at the university of Bologna to present a lecture on Italy’s Marshallian industrial districts. After the lecture, the hosts took Bianchi on a walking tour of Seattle’s Pike Place Market, pointing to market stalls and fresh produce with obvious pride. Bianchi was non-plussed, much as if a group of Americans had been treated to a tour of a Walmart in Rome.

Video: Portland’s Housing Market

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.

 

A critical look at suburban triumphalism

The “body count” view of suburban population misses the value people attach to cities

Lately, we’ve seen a barrage of comments suggesting that the era of the city is over, and that Americans, including young adults, are ready to decamp to the suburbs. We think this new wave of suburban triumphalism is missing some key points about the growing value people attach to urban living. Our takeaways:

  • Well-educated young adults are increasingly moving to cities and propelling city growth; their numbers are up 19 percent since 2012.
  • Counties are the wrong units for measuring whether city centers are growing or not. (We explore how misleading this is, using Chicago as an example).
  • In overall population growth, cities are performing better than they did in the previous decade, suburbs are performing worse than they did a decade ago.
  • We’re bumping up against the limits of how much cities can grow:  For a while they could grow by  reducing vacancy in existing housing; now they have to grow by building new units. That’s happening, but not fast enough.
  • People are paying a premium to live in cities; The value people attach to urban living (diverse, interesting, walkable neighborhoods) continues to rise relative to auto-dependent suburbs. In this case, price rather than quantity is a better measure of preference.

“The suburbs are back, baby” or so we’re told.

At least that’s the message we’re getting from many who look at population trends. The very careful Jed Kolko looks through the latest county population estimates and notes that in the aggregate the most suburban counties are again growing somewhat faster than the most urban counties.  Joel Kotkin, the patron saint of suburbanization hails this as a decisive turning point:

The trend of people moving to metros with the densest urban cores—a mainstay of media coverage—is clearly over.

Writing at Bloomberg, Conor Sen chimes in:

But every year that passes, the more population patterns are starting to look like the old sprawling dynamic serving suburban and exurban demand.

CityLab tracks down Joel Garreau, who coined the term “Edge Cities” back in the 1980s, to reprise his views on suburban triumphalism.  He dismisses city growth as limited and exceptional, confined to just a few rich cities.

Garreau dismissed the idea of a return to central cities as much ado about a handful of coastal locales that just happen to be home to most of the people who write and read about these kinds of things. The only downtowns that are seeing significant growth, he said, are New York, Washington, Boston, Seattle, Portland, Oregon, and San Francisco. All of them are very wealthy, and very non-representative.

“Yes, in six cities it’s happening, where the children of the people who read The New York Times live,” he said. “But I’m a numbers guy, and you’ll find that the vast majority of Millennials don’t live in the old downtowns but in the suburbs, like sensible human beings. Because that’s where the jobs are, or where their parents’ basements are if they don’t have a job.”

A closer look at the numbers

Let’s start with the population estimates. Jed Kolko has done a neat job of parsing census data, dividing counties in the nation’s large metro areas into broad categories of city and suburb. He correctly notes that in the aggregate, counties in the “suburb” category have added people faster in the past year than counties in the “city” category.

But a we’ve pointed out before, counties are fundamentally the wrong unit for measuring urban growth. County boundaries vary tremendously from region to region, and seldom match up with dense city centers. (See the discussion of Chicago and Cook County, below, for a detailed explanation of how county data conceal rapid growth in the core by combining it with declining first-tier suburbs).

It’s also important to put these numbers in a broader historical context:  While city growth has slowed and suburbs have rebounded in the past couple of years, compared to the first decade of the 2000s, city growth has accelerated, while suburban growth has slowed. Growth in the lowest density suburban counties which was running more than 2 percent per year (the gray line below) is still well below that level. Higher density suburbs are also below their growth rate of the previous decade (orange line). While growth in urban counties has slowed, its higher than it was in the prior decade (blue line). What we’ve really seen is convergence: low density counties wildly outpaced urban ones a decade ago; now all three categories are growing at much more similar rates. (And remember: this is the county level data that conceals what’s happening in the densest urban neighborhoods)

Source: Jed Kolko

It’s also a mistake to look just at domestic migration data. For example, Kotkin and Cox repeatedly point out that big cities like New York and Los Angeles are experiencing high levels of domestic out-migration.  That’s actually always been true because these cities are immigrant gateways. Domestic migration only counts those who lived in the US in the past year, and so misses foreign immigrants. The combination of births, international immigration and still considerable gross flows of in-migrants have fueled growth in large cities.

Who is moving to cities?

The raw numbers tell part of the story, but what’s equally important is to look at who is moving to cities. We’ve been carefully following these data for more than a decade, and we’ve seen a consistent, and accelerating trend:  it’s well educated young people who are fueling city center growth. In our 2014 report, the Young and Restless, we showed that close-in urban neighborhoods–those places within three miles of the center of the central business district, have been adding college-educated young adults twice as fast as in their surrounding metropolitan areas.

We updated this analysis earlier this year, looking at data on city population growth. The number of 25-34 year olds with four-year degrees living in large cities is growing almost twice as fast as that demographic group is growing outside those cities. In just the past five years there’s been a  19 percent increase in 25-34s with a college degree. The preference of young workers for urban living is drawing more firms to city centers, generating additional jobs for workers of all ages.

Some, like Conor Sen, try to claim that this back to the city movement will peter out as millennials age and have children. But this view conflates life cycle changes with generational shifts in preferences: older adults are always somewhat more suburban, but less so than in previous decades. And as Millennials age out of the 25-34 year old age group, they are being replaced by an equally numerous next generation, that is similarly, if not more urban-oriented.

Prices tell us people value urbanity and that we’ve got a shortage of cities

Focusing just on population changes, implicitly makes a naive and questionable assumption about revealed preference, that everyone is getting to live exactly where they would prefer. But we have good reason to believe that lots more people would like to live in cities if we built enough housing for them. The most powerful evidence on this point is the high and rising price premium that is being paid for urban housing. A variety of studies have confirmed this fundamental shift. Here’s the data on relative home prices (In constant dollars) compiled by Columbia University economist Lena Edlund and her colleagues. Homes located in the urban center now command much higher prices than they did two or three decades ago.

As we’ve noted this relative price increase in the most urban neighborhoods compared to suburbs constitutes a kind of “Dow” of cities, and reflects the value Americans attach to urban living. Data compiled by Fitch from the Case-Shiller repeat sales home price index shows that over the past 15 years or so, prices for the densest urban neighborhoods have increased about 50 percent faster than for suburban housing.

The urban price premium is driven by a growing demand for cities, but more recently, it also reflects a constrained supply. For a while, cities could grow faster than suburbs by reducing vacancies. But vacancies have shrunk, and now city population growth is bumping up against the limits of urban housing stock. As is most evident in places like San Francisco, demand for urban housing has increase much faster than supply, with the result that prices are high, and many people who would like to live their (or who did until recently) can’t afford the rent.

So far from illustrating the demise of the demand for cities, the somewhat faster recent growth of suburbs is fueled in part by the fact that we haven’t addressed our shortage of cities.

Lessons from the Windy City

It’s illuminating to look to see how these trends play out in a particular city. In some respects, Chicago is the poster-child for city population decline. But if you look in detail, you see a strong urban center and decline in the suburbs. County-level data mask the growth in the downtown Loop and nearby neighborhoods. It’s actually the case that these parts of the city of Chicago are booming and gaining tons of smart young residents.

Keep in mind that Cook County, Illinois, encompasses the city of Chicago–and dozens of surrounding suburbs. Cook County is losing population in the aggregate, but chiefly in its aging, first-tier suburbs. But Cook County is huge, and only partly the center of the metro. Downtown Chicago is booming (with 47 high rises under construction–mostly for new housing). Our analysis earlier this year shows that in the four years, 2012 to 2016, the City of Chicago (not Cook County) added 42,000 25-34 year olds with a four year degree, up 17% over just five years.

Meanwhile: When you look at Chicago’s suburban counties, they’re underperforming their previous growth, and many are declining in population. Chicago Business tracked down local demographers who’ve carefully studied change within the metro area. What they find is a surging center and declining suburbs:

. . .  according to demographers at the Chicago Metropolitan Agency for Planning, Cook is just returning to the slow decline that pretty much halted during the subprime mortgage recession, in which migration nationally slowed to a crawl.

The real thing that’s changed is that outer counties such as Will and McHenry aren’t growing nearly as fast as they did in prior decades, combined with a sharp reduction in immigration to the Chicago area, according to Elizabeth Schuh, principal policy analyst at CMAP, which represents the seven Illinois counties in the region but not those in northwest Indiana or southeast Wisconsin. “Almost all of the counties except Kendall are losing,” says Schuh, who’s had a few days to study the data. (emphasis added)

According to a new study by Schuh and CMAP’s Aseal Tineh, the population drop since 2006 among native-born residents is exclusively concentrated among those who earn less than $75,000 a year and, in the case of the foreign-born, less than $25,000. But the region has gained more than 350,000 residents since 2006 who earn at least $75,000 year, she says. (Those figures are not adjusted for inflation.)

Slow employment growth in many sectors likely is the reason, she says. “Our job growth is just lower than (in) other regions,” for middle-skilled positions in fields such as manufacturing and administration that require some post-high school education but not a college degree. But among the college-educated, the region continues to grow.

When you look city-by-city at the data, its apparent that urban centers are extremely robust, are attracting more talented young workers, and the firms who want to employ them. What cities everywhere are bumping up against, however, is the slowly growing supply of housing in great urban neighborhoods–a fundamental fact reflected in the growing city housing price premium.

Housing: A shortage of cities

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

Gerontopoly: Homeownership, wealth, and age

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.

Because homeowners tend to be older while renters are younger, the limited growth in housing supply has created an intergenerational transfer to currently older people who happened to have owned in the relatively small number of coastal markets that have seen land values increase substantially.

The only gainers in housing wealth over the past 3 decades have been older Americans. Those under 55 today have accumulated far less housing equity than previous generations.  For boomers and the greatest generation, homeownership worked out well as a wealth building strategy. But in large part that’s because they followed the old investment adage, “buy low and sell high.” If you could buy US homes at 1970s or 1980s prices and hold them for decades (as many of today’s 55 and older homeowners have) you’ve reaped a substantial investment gain.  But for those who bought more recently, especially in the height of the housing bubble, the road has been considerably rockier. They’ve already fallen dramatically behind previous generations in building equity, and the only way that they’ll catch up is if home prices accelerate further–which implies that housing becomes less affordable for everyone else.

 

 

Housing reparations for Northeast Portland

Attention freeway builders! Want to make up for dividing the community and destroying neighborhoods? How about replacing the homes you demolished?

One of the carefully crafted talking points in the sales pitch for the $450 million proposed Rose Quarter I-5 freeway widening project in Northeast Portland is the idea that it is somehow going to repair the damage to a community split asunder by a combination of road building and urban renewal in the 1960s. The Oregon Department of Transportation (ODOT) has created the illusion that the slightly widened freeway overpasses its building will be aesthetic “covers” that will somehow knit the neighborhood–historic center of the region’s African-American community–back together.

Over 300 homes were demolished along Minnesota Ave. (City of Portland Archives)

And political leaders have jumped on the bandwagon to make this point.

Portland Mayor Ted Wheeler went so far as claiming that the project,

“. . . restores the very neighborhood that was the most impacted by the development of I-5 and that’s the historic African American Albina community.”

And also following up in an interview:

One of the parts of this that nobody talks about, that frankly is the most interesting to me, is capping I-5 and reconnecting the street grid for the historic Albina community. And that of course is mostly a bicycle and pedestrian play. So I think this is being mischaracterized somewhat when people say, ‘Oh this is just a freeway expansion and it’s never going to meet its goals of congestion reduction.’ This is far from just focusing on just congestion reduction, this is an opportunity to restore one of our most historic — and not coincidentally — African American neighborhoods in this community.

City Commissioner Dan Saltzman added:

These new, seismically upgraded bridges will provide better street connections, improved pedestrian and bicycle facilities, a new pedestrian and bicycle-only bridge as well as lids (or covers) of the freeway that can provide much needed community space.ODOT is selling the project as a way of fixing the damage the freeway did to the area.

Public Policy and Community Affairs Manager Shelli Romero talked up the agency’s “environmental and public process” which will include:

“. . . a robust understanding, research and engagement strategy of the historically wronged African-American community and other communities of color. We understand the historic inequity concerns and will engage all communities in this project,” Romero promised.

Noble sentiments to be sure. But in our view this project does nothing to right the wrongs of freeway construction. Despite the high-minded rhetoric, widening the freeway repeats the same errors made a half-century ago and make the neighborhood’s livability worse. If these leaders are serious about redressing the historical wrongs done here, they could do much better.

The freeway and the damage done

But let’s step back for a minute and look at what the construction of the Rose Quarter Freeway did to the North and Northeast Portland neighborhoods is slashed through in the 1960s. Originally, I-5 was called the Minnesota Freeway, not because it led to that state, but because it followed the route of Minnesota Avenue. A few vestiges of that street remain, but mostly, I-5 runs in a trench that was excavated right down the middle of the former Minnesota Avenue (in some places also wiping out parts of the adjacent Missouri Avenue.  The freeway runs for 3 miles from Broadway to just north of Lombard Street.  In that stretch of road, the city also ended up dead-ending some 25 East-West cross streets. The southern portion of the route passed through the historically African-American neighborhoods of Albina.

The Minnesota Freeway cut a trench through N. Portland (City of Portland Archives)

 

When it built the freeway, the city condemned or purchased hundreds of homes in the neighborhood. We haven’t been able to locate any official Oregon State Highway Department records, but contemporary press accounts say at least 327 homes were demolished for the freeway.

Portland Oregonian, May 8, 1959

The highway department paid as little as $50 for homes, and because it judged that there were a sufficient number of vacant units in the region, it didn’t build any replacement housing. (Decades later, the highway builders did construct concrete sound walls to buffer the adjacent neighborhoods from the freeway noise.) The City of Portland tried to find money to help offset the displacement, but was barred from using urban renewal funds for the project. There’s no evidence the Oregon State Highway Department replaced even one of the more than 300 homes it demolished.

It’s now mostly lost to memory, but real people were displaced by freeway construction. We can get a glimpse of their presence and identity by looking at the City Directory for N. Minnesota Avenue for 1958, which lists the names and house numbers of all the families living along the street. George Palo, Victor Burns, Andre Guyot, Eldon Methum, John Pesola, Bernard Kolander, Arvid Renko, Lydia Kyrkus, Perry Anderson, Harold Roberts, Wesley Koven, John Mattila, Bernard Henry, Percy Stevens, Ida Davis, Reverend Monroe Cheek, and hundreds of others were living on Minnesota Avenue.

In 1958, hundreds of families lived on N. Minnesota Ave.

 

Just four years later all these people were gone.  The 1962 City Directory contains a blank spot where these houses and their hundreds of Portland residents had lived. Not a single building or resident remained on the blocks between N. Cook Street and N. Going Street.

By 1962, there were no houses left on N. Minnesota Ave. between Cook and Going Streets

 

With hundreds fewer homes and residents, there were fewer customers for local businesses, fewer students for local schools, and less property tax revenue to pay for public services. The quality and health of this neighborhood was sacrificed to speed through traffic and facilitate increasing suburban car commuters. The freeway had other effects on the neighborhood. It bisected the attendance area for the Ockley Green Elementary School, meaning many students could no longer easily walk to school. Several local neighborhood streets were transformed into busy, high speed off ramps. In the planning process, local officials raised these concerns with the state highway department, and were offered assurances that “every effort” would be made to solve these problems. The words spoken by highway department officials then sound almost identical to the assurances offered by ODOT spokesmen in response to concerns raised today about the Rose Quarter project. University of Oregon historian Henry Fackler describes the 1961 meeting convened by the city to address the effects of street closures:

At the meeting’s conclusion, state engineer Edwards assured those in attendance that “every attempt will be made to solve these problems.” The freeway opened to traffic in December 1963.  No changes were made to the route.

As part of today’s Rose Quarter freeway widening process, ODOT is holding similar meetings to the ones it held 55 years ago. When the Cascadia Times recently tried to follow up on concerns about construction and air quality impacts of the proposed freeway widening project on local schools, and was given a similar vague reassurance:

ODOT declined to make Johnson or Braibish available for comment. But spokesperson Don Hamilton pointed out that any ODOT construction is several years out, and that planning is in a very preliminary stage. He noted that PPS [Portland Public Schools] is moving on a different time frame than ODOT, but that when all is said and done, “We’ll work with them to make sure their needs are met …”

A tale of two agencies

Public leaders have acknowledged that freeway building and urban renewal devastated neighborhoods in Portland (and in cities around the US). It’s one thing to acknowledge a past transgression, but the sincerity of that admission is measurable by whether there’s any actual willingness to repair the damage done.

In recent years, the Portland Development Commission (now Prosper Portland) has publicly acknowledged the role its urban renewal programs played in undermining North and Northeast Portland neighborhoods.  Its dedicated a substantial portion of its tax increment financing moneys in the area to building new housing. The city even has a program to identify households displaced from the neighborhood by urban renewal, and give them preferential access to newly constructed subsidized housing.

In contrast, the Oregon Department of Transportation is proposing to double down on the scar it carved through the neighborhood. Its proposal widens the freeway. Despite talking points to the contrary, three key design features of the project show that the agency has the same old indifference to its impacts on the neighborhood. First, the widening project will run theeven closer to Harriet Tubman Middle School, so close, in fact that construction may undermine part of the building’s foundations, and worsen air quality. The Portland school district is contemplating a million dollar proposal for a wall and vegetation to shield the school from existing freeway emissions. Second, as we’ve discussed at City Observatory, the project will demolish the nearby Flint Avenue Bridge, a key low-speed, bike-friendly neighborhood street that crosses the freeway. Third, the project re-arranges the local streets connecting to the freeway into a miniature “diverging diamond” interchange, designed to speed car traffic, but creating a hostile and dangerous situation for pedestrians. Far from righting historical wrongs, ODOT is embarked on an expensive plan to repeat them, and inflict further damage on this neighborhood.

What ODOT should do: Build housing

If it really wants to make amends for the extensive damage freeway building did to North and Northeast Portland, and fulfill Mayor Wheeler’s pledge of “restoring” the neighborhood, a good place to start would be by replacing the housing demolished to build the Minnesota Freeway in the 1960s.  The average price of single family homes adjacent to the freeway (which is no doubt negatively affected by noise and air pollution) is about $424,000.  If ODOT were to build 330 or so homes to replace those lost in the 60s, the total cost would be approximately $140 million.

It’s worth keeping in mind that for the past 50 years, Portland has been negatively affected by the loss of that housing. Not only were its original residents displaced, but the loss of that housing meant fewer options for people who wanted to live in that neighborhood, fewer students at local schools, fewer customers for local businesses, and less property tax revenue for the city and schools.  More housing in this neighborhood would come at a propitious moment: helping alleviate a housing shortage, and providing more opportunities to live in one of the region’s most walkable, bike-friendly locations.

This freeway slashed through Portland neighborhoods, destroyed housing, and displaced families. Widening that freeway–at the cost of half a billion dollars–does nothing to right that wrong. It actually repeats the same mistake. If it’s serious about fixing the damage it’s done, it could do something very different and meaningful:  build homes.


This post has been revised to correct identify Missouri Avenue as the other street affected by freeway construction, and to correct formatting errors in the originally published version.

Happy Earth Day, Oregon! Let’s Widen Some Freeways!

If you’re serious about dealing with climate change, the last thing you should do is spend billions widening freeways.

April 22 is Earth Day, and to celebrate, Oregon is moving forward with plans to drop more than a billion dollars into three Portland area freeway widening projects. It isn’t so much Earth Day as a three-weeks late “April Fools Day.”

Four decades after the city earned national recognition for tearing out a downtown freeway, it gets ready to build more. Back in the day, Portland built its environmental cred by tearing out one downtown freeway, and cancelling another–and then taking the money it saved to build the first leg of its light rail system. In place of pavement and pollution, it put up parks. Downtown Portland’s Willamette riverfront used to look like this:

Now the riverfront looks like this:

 

But as part of a transportation package enacted by the 2017 Oregon Legislature, higher gas taxes and vehicle registration fees will be used partly to shore up the state’s multi-billion dollar maintenance backlog, but prominently to build three big freeway widening projects in the Portland metropolitan area. One project would spend $450 million to add lanes to Interstate 5 near downtown Portland, two others would widen freeways in the area’s principal suburbs. The estimated cost of the projects would be around a billion dollars, but when it comes to large projects, the Oregon Department of Transportation is notorious for grossly underestimating costs. Its largest recent project, widening US Highway 20 between Corvallis and Newport was supposed to cost a little over $100 million but has ended up costing almost $400 million.

The plan flies in the face of the state’s legally adopted requirement to reduce greenhouse gases. Just last year, the state’s Greenhouse Gas Commission (of course, Oregon has one) reported that the state is way off track in achieving its statutorily mandate to reduce greenhouse gases by 10 percent from their 1990 levels by 2020.  The commission’s finding:

Key Takeaway: Rising transportation emissions are driving increases in statewide emissions.

As the updated greenhouse gas inventory data clearly indicate, Oregon’s emissions had been declining or holding relatively steady through 2014 but recorded a non-trivial increase between 2014 and 2015. The majority of this increase (60%) was due to increased emissions from the transportation sector, specifically the use of gasoline and diesel. The reversal of the recent trend in emissions declines, both in the transportation sector and statewide, likely means that Oregon will not meet its 2020 emission reduction goal. More action is needed, particularly in the transportation sector, if the state is to meet our longer-term GHG reduction goals.

In Oregon, as in many states, transportation is now the largest source of greenhouse gas emissions, and cheaper gas is now prompting more travel. The decline in gasoline prices in mid-2014 prompted an increasing in driving and with it, an increase in crashes and carbon pollution.  Oregon’s vehicle miles traveled, which had been declining steadily, ticked up in 2015, as did its fatality rate. Building more freeway capacity–which will trigger more traffic–flies in the face of the state’s stated and legislated commitment to reducing greenhouse gases.

Building more capacity doesn’t solve congestion, it just increases traffic (and emissions)

The new word of the day is bottleneck: Supposedly, adding a lane or two in a few key locations will magically remedy traffic congestion. But the evidence is always that when you “fix” one bottleneck, the road simply gets jammed up at the next one. As the Frontier Group has chronicled, the nation is replete with examples of billion dollar boondoggle highways that have been sold on overstated traffic projections, and which have done little or nothing to reduce congestion.

As we all know, widening freeways to reduce traffic congestion has been a spectacular failure everywhere its been tried. From the epic 23-lanes of the Katy Freeway, to the billion dollar Sepulveda Pass in Los Angeles, adding more capacity simply generates more traffic, which quickly produces the same or even longer of delays. The case for what is called induced demand is now so well established that its now referred to as “The Fundamental Law of Road Congestion.” Each incremental expansion of freeway capacity produces a proportionate increase in traffic. And not only does more capacity induce more demand, it leads to more vehicle emissions–which is why claims that reducing vehicle idling in congestion will somehow lower carbon emissions is a delusional rationalization.

If you’re a highway engineer or a construction company, induced demand is the gift that keeps on giving: No matter how much we spend adding capacity to “reduce congestion,” we’ll always need to spend even more to cope with the added traffic that our last congestion-fighting project triggered. While that keeps engineers and highway builders happy, motorists and taxpayers should start getting wise to this scam.

A Faustian bargain for transit and active transportation

Portland’s  freeway widening proposal was part of a convoluted political bargain to justify spending for a proposed light rail line. Supposedly, voters won’t approve funding for new transit expansion in Portland unless its somehow “bundled” with funding for freeway expansion projects. That flies in the face of experience of other progressive metropolitan areas, including Denver, Los Angeles and San Francisco.  Urban transit finance measures have a remarkable 71 percent record of ballot box success. Just last November, voters in Seattle approved a $54 billion (that’s with a “B”) Sound Transit3 tax measure to fund a massive, region-wide expansion of bus and rail transit. To argue that you can’t get public support to fund transit with out also subsidizing freeways is an argument that’s at least 50 years out of date.

The good news is that there’s some pushback from folks who think more freeways isn’t a solution to anything. But a lot of the energy seems to be directed to a “me too” package of investments in token improvements to biking and walking infrastructure. As Strong Town’s Chuck Marohn warns, that’s a dead end for communities, the environment and a sensible transportation system; while he’s writing about Minnesota, the same case applies in Oregon:

Oh, they’ll pander to you. They’ll promise you all kinds of things….fancy new trains (to park and rides), bike trails (in the ditch, but not safe streets)….but this system isn’t representing you at all. It’s on autopilot. It’s got a long line of Rice interchanges and St. Croix bridge projects just ready to go when you give them the money. Don’t do it.

And as a final word, for those of you hoping to fund transit, pedestrian and cycling improvements out of increased state and federal dollars, I offer two observations. First, you are advocating for high-return investments in a financing system that does not currently value return-on-investment. You are going to finish way behind on every race, at least until we no longer have the funds to even run a race. Stop selling out for a drop in the bucket and start demanding high ROI spending.

Second, the cost of getting anything you want is going to be expansive funding to prop up the systems that hurt the viability of transit, biking and walking improvements. Every dollar you get is going to be bought with dozens of dollars for suburban commuters, their parking lots and drive throughs and their mindset continuing to oppose your efforts at every turn. You win more by defunding them than by eating their table scraps.

So when it comes to 21st Century transportation and Earth Day, maybe we should start with an environmental variation on the Hippocratic Oath:  “First, do no harm.” We were smart enough to stop building freeways when environmentalism was in its infancy, and the prospects of climate change were not nearly so evident. Why aren’t we smart enough to do the same today?

 

 

The Ben & Jerry’s crash course in transportation economics

They’ll be lined up around the block because the price is too low–just like every day on urban roads

Today’s that day, folks. Ben and Jerry are giving away free ice cream to everyone who comes by their stores. Whether you’re hankering for Cherry Garcia or Chunky monkey, you can now get it for absolutely zero price.

Well, there is that one thing:  You’re going to have to wait in line, and probably for a long time. As you’re standing there, it would be a good time for you to ponder the valuable lesson that Ben and Jerry are providing in the fundamentals of transportation economics.

Gridlock.

You’ll note that unlike the average day at a Ben and Jerry’s, when you might have to wait in line a for a minute or two to get your favorite flavor, now you’re going to end up waiting twenty minutes, or a half hour, or possibly longer.  In terms of customers served and gallons scooped, this is going to be their biggest day of the year–last time they gave out a million scoops of ice cream worldwide.

You’ll probably also notice that most of the people standing in line are people who aren’t working nine-to-five.  Not many investment bankers or plumbers, but lots of students, moms with small kids, and people who have at least part of the day off from work.

Make no mistake, although you’re not laying out any cash for your ice cream, you are paying for it: with your time. Let’s say that you’d pay $2.50 for that scoop of Phish Food (they’re a bit smaller than regulation on free cone day).  If you have to wait half an hour, and you value your time at say, $15.00 per hour, that $2.50 scoop really cost you something like $7.50.  It’s a safe bet that most of the people waiting in line value their time at something less than $5.00 an hour if they’re willing to wait that long for a “free” cone. Also, if you really want ice cream, and are pressed for time, there’s no way that you’re going to jump to the head of the line no matter how much you’d be willing to pay.

Free. It only works because its one day a year.

Substitute “freeway” for “free cone” and you’ve got a pretty good description of how transportation economics works. When it comes to our road system, every rush hour is like free cone day at Ben and Jerry’s.  The customers (drivers) are paying zero for their use of the limited capacity of the road system, and we’re rationing this valuable product based on people’s willingness to tolerate delays (with the result that lot’s of people who don’t attach a particularly high value to their time are slowing down things for everyone).

If Ben and Jerry’s were run by traffic engineers, instead of smart business people (albeit smart business people with a strong social minded streak), they’d look at these long lines and tell Ben & Jerry that they really need to expand their stores.  After all, the long lines of people waiting to get ice cream represent “congestion” and “delay,” that can only be solved by building more and bigger ice cream stores. And thanks to what you might call the “fundamental law of ice cream congestion” building more stores might shorten lines a little, but then it would likely prompt other people to stand in line to get free ice cream, or to go through the line twice. But, of course, with zero revenue Ben & Jerry would find it hard to build more stores.

No doubt Ben and Jerry generate enough good will, and probably attract a few new customers with their willingness to give up one day of revenue per year. And they’ll make more than enough money on the other 364 days of the year to cover their losses. But what works for ice cream one day a year is an epic failure when it comes to roads. As long as the price is zero, there will be more demand than you can handle, and you’ll be struggling to pay for the capacity that (you think) is needed.

 

The Week Observed, April 6, 2018

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.

 

The Week Observed, April 13, 2018

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.

The Week Observed, April 20, 2018

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.

 

The Week Observed, April 27, 2018

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 of Cities

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:

Screenshot 2015-08-12 20.59.59

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.

 

The Cappuccino Congestion Index

The Cappuccino Congestion Index shows how you can show how anything costs Americans billions and billions

We’re continuing told that congestion is a grievous threat to urban well-being. It’s annoying to queue up for anything, but traffic congestion has spawned a cottage industry of ginning up reports that transform our annoyance with waiting in lines into an imagined economic calamity. Using the same logic and methodology that underpins these traffic studies, its possible to demonstrate another insidious threat to the nation’s economic productivity: costly and growing coffee congestion.

cappuccino_line

Yes, there’s another black fluid that’s even more important than oil to the functioning of the U.S. economy: coffee. Because an estimated 100 million of us American workers can’t begin a productive work day without an early morning jolt of caffeine, and because one-third of these coffee drinkers regularly consume espresso drinks, lattes and cappuccinos, there is significant and growing congestion in coffee lines around the country. That’s costing us a lot of money. Consider these facts:

  • Delays waiting in line at the coffee shop for your daily latte, cappuccino or mocha cost U.S. consumers $4 billion every year in lost time;
  • The typical coffee drinker loses more time waiting in line at Starbucks than in traffic congestion;
  • Delays in getting your coffee are likely to increase because our coffee delivery infrastructure isn’t increasing as fast as coffee consumption.

Access to caffeine is provided by the nation’s growing corps of baristas and coffee bars. The largest of these, Starbucks, operates some 12,000 locations in the U.S. alone. Any delay in getting this vital beverage is going to impact a worker’s start time–and perhaps their day’s productivity. It’s true that sometimes, you can walk right up and get the triple espresso you need. Other times, however, you have to wait behind a phalanx ordering double, no-whip mochas with a pump of three different syrups, or an orange-mocha frappuccino. These delays in the coffee line are costly.

To figure out exactly how costly, we’ve applied the “travel time index” created by the Texas Transportation Institute to measure the economic impact of this delay on American coffee drinkers. For more than three decades TTI has used this index to calculate the dollar cost of traffic delays–here we use the same technique to figure the value of “coffee delays.”

The travel time index is the difference in time required for a rush hour commute compared to the same trip in non-congested conditions. According to Inrix, the travel tracking firm, the travel time index for the United States in July 2014  was 7.6, meaning that a commute trip that took 20 minutes in off-peak times would take an additional 91 seconds at the peak hour.

We constructed data on the relationship between customer volume and average service times for a series of Portland area coffee shops.  We used the 95th percentile time of 15 seconds as our estimate of “free flow” ordering conditions—how long it takes to enter the shop and place an order.  In our data-gathering, as the shop became more crowded, customers had to queue up. The time to place orders rose from an average of 30 to 40 seconds, to two to three minutes in “congested” conditions. The following chart shows our estimate of the relationship between customer volume and average wait times.

Coffee_Speed_Volume

Following the TTI methodology, we treat any additional time that customers have to spend waiting to place their order beyond what would be required in free flow times (i.e. more than 15 seconds) as delay attributable to coffee congestion.

Based on our observations and of typical coffee shops and other data, we were able to estimate the approximate flow of customers over the course of a day. We regard a typical coffee shop as one that has about 650 transactions daily. While most transactions are for a single consumer, some are for two or more consumers, so we use a consumer per transaction factor of 1.2. This means the typical coffee shop provides beverages (and other items) for about 750 consumers. We estimate the distribution of customers per hour over the course of the day based on overall patterns of hourly traffic, with the busiest times in the morning, and volume tapering off in the afternoon.

We then apply our speed/volume relationship (chart above) to our estimates of hourly volume to estimate the amount of delay experienced by customers in each hour.  When you scale these estimates up to reflect the millions of Americans waiting in line for their needed caffeine each day, the total value of time lost to cappuccino congestion costs consumers more than $4 billion annually. (Math below).


 

This is—of course—our regular April First commentary, and savvy readers will recognize it is tongue in cheek, but only partly so.  (The data are real, by the way!) The real April Fools Joke here is the application of this same tortured thinking to a description and a diagnosis of the nation’s traffic problems.

The Texas Transportation Institute’s  best estimate is that travel delays cost the average American between one and two minutes on their typical commute trip. While its possible–as we’ve done here–to apply a wage rate to that time and multiply by the total number of Americans to get an impressively large total, its not clear that the few odd minutes here and there have real value. This is why for years, we and others have debunked the TTI report. (The clumping of reported average commute times in the American Community Survey around values ending in “0” and “5” shows Americans don’t have that precise a sense of their average travel time anyhow.)

The “billions and billions” argument used by TTI to describe the cost of traffic congestion is a rhetorical device to generate alarm. The trouble is, when applied to transportation planning it leads to some misleading conclusions. Advocates argue regularly that the “costs of congestion” justify spending added billions in scarce public resources on expanding highways, supposedly to reduce time lost to congestion. There’s just no evidence this works–induced demand from new capacity causes traffic to expand and travel times to continue to lag:  Los Angeles just spent a whopping billion dollars to widen Interstate 405, with no measurable impact on congestion or traffic delays.

No one would expect to Starbucks to build enough locations—and hire enough baristas—so that everyone could enjoy the 15 second order times that you can experience when there’s a lull. Consumers are smart enough to understand that if you want a coffee the same time as everyone else, you’re probably going to have to queue up for a few minutes.

But strangely, when it comes to highways, we don’t recognize the trivially small scale of the expected time savings (a minute or two per person) and we don’t consider a kind of careful cost-benefit analysis that would tell us that very few transportation projects actually generate the kinds of sustained travel time savings that would make them economically worthwhile.

Ponder that as you wait in line for your cappuccino.  We’ll be just ahead of you ordering a double-espresso macchiato (and holding a stopwatch).


Want to know more?

Here’s the math:  We estimate that a peak times (around 10am) the typical Starbucks makes about 100 transactions, representing about 120 customers.  The average wait time is about two and one-half minutes–of which about two minutes and 15 second represents delay, compared to free flow conditions.  We make a similar computation for each hour of the day (customers are fewer and delays shorter at other hours).  Collectively customers at an typical store experience about 21 person hours of delay per day (that’s an average of a little over 90 seconds per customer).  We monetize the value of this delay at $15 per hour, and multiply it by 365 days and 12,000 Starbucks stores.  Since Starbucks represents about 35 percent of all coffee shops in the US, we scale this up to get a total value of time lost to coffee service delays of slightly more than $4 billion.