NIMBYs: loss aversion and, geography of, and rhetorical fallacies of

Not all change is bad.

It won’t rank high in the annals of “speaking truth to power,” but it’s interesting to read Washingtonian writer Marisa M. Kashino’s take on DC’s systemic housing underproduction: “But the District hasn’t shown much nerve when it comes to making big changes… Which brings us to the unusual power wielded by the city’s NIMBYs.” (City magazines usually aren’t known for taking their wealthy readers to task.)

But Megan McArdle, writing for Bloomberg View, says this is an unlikely scenario. Writing about the current back-and-forth regarding DC’s zoning, she says it’s been “Two steps forward, sure, but such little steps, and now we’re looking at going backward again.” But why are zoning fights so inherently difficult? McArdle points to cognitive biases: “At the heart of the matter is loss aversion: people will fight harder to preserve something they have than they will for a potential gain.”

Three related thoughts on NIMBYs:

1. History doesn’t offer much encouragement. In theory, a clear majority of citizens would benefit from abundant housing, but they rarely voice broad support on behalf of their minimal gains — and certainly rarely can drown out the fewer but louder voices who could lose benefits under the current system. For example, Red Vienna democratically chose to tax the rich to build mass public housing, but it took an abominable housing crisis (and the World War-spurred collapse of an empire) to force the electorate into action.

2. It’ll be interesting to see how similar politics plays out in other policy arenas — a thought that came to mind when listening to a recent talk about the feasibility of “deep decarbonization,” i.e. reaching the -80% CO2/2050 goal necessary to stabilize a changing climate. Although the study found that total energy services costs will increase only slightly — by about 1% of GDP by 2050 — it found that, within that energy services budget, the balance will shift from fuel providers to capital.

A clean energy economy will build renewable power plants (i.e., cap ex) which cost more upfront, but thereafter will throw off energy with very little ongoing costs. In the case of “negawatts” from efficiency, highly efficient or even net-zero buildings cost more up front, but cost much less to operate and maintain. This is a huge contrast from the existing system, whereby fuel providers extract huge rents from the rest of the economy.

Geographically, this shift should benefit most places, since green power is widespread — somewhat like Portland’s Green Dividend. However, the relatively few places that currently live off of fossil-fuel “resource rents” will lose out, and will fight back. Even though just three small states produce almost 60% of US coal, their representatives’ passion for coal far outweighs the millions who would benefit if coal pollution were reduced.

3. One of the NIMBYs’ favorite rhetorical fallacies is “the shill gambit,” an ad hominem attack that proclaims any non-NIMBY to be a secret, Astroturf-esque “paid shill” for development interests. (Some people can’t conceive that there are non-monetary, non-selfish reasons to hold a given position.) This contemptible lie — which slanders the opponent’s ethics to “poison the well” and thus avoid an argument on the merits — is readily leveled against pro-density forces even when it’s demonstrably false, including SFBARF in San Francisco or, of course, against yours truly.

This particular lie isn’t unique to arguments about development, of course. Naturally, conspiracy theorists of all stripes like to paint their opponents as all part of the same conspiracy that’s out to get them. It’s especially common among “alternative medicine” quacks, who love to call anyone who questions their arguments pharma shills — a label some have embraced with the hashtag #shillarmy. In an indication of how tired and un-useful the argument is, it’s been banned on parts of Reddit. If only such moderators were active elsewhere.

Housing market myths: USA’s biggest landlord says outsiders not to blame for high SF, NY, DC rents

Conference calls announcing corporate quarterly earnings don’t usually turn up explanations about why the Rent Is Too Damn High, but then again most companies don’t own 100,000 apartments across America, clustered in the biggest and most expensive cities. These are the folks who are raising your rent, and the reasons why don’t have anything with the usual bogeymen.

So, forthwith, some annotated comments by David Santee, chief operating officer of Equity Residential, from their 2014 results call.

Lofts 590, Crystal City

Equity Residential owns this building, and most of the thousands of apartments in Arlington’s Crystal City neighborhood.

 

1. California’s multi-year drought wasn’t solved with a few days of rain this winter — and, as the state legislature’s own analysis says, the generation-long drought of housing starts won’t be solved with a few new towers here and there:

“San Francisco continues with epic pace with significant acceleration in Q4 [2014]. In one of the most under-housed cities in the country, deliveries are minuscule and simply don’t seem to be relevant.”

Indeed, San Francisco is in such negative territory with housing (and water, for that matter) that more than doubling San Francisco’s population (which would still leave it half as dense as Manhattan) might only have kept housing price inflation in line with the national average. Note that’s not “falling housing prices,” since that’s rare, just “not increase quite as fast.”

2. New York City’s too-damn-high prices can’t be blamed solely on a handful of zillionaires snapping up shoeboxes in the sky. Instead, the blame lies squarely on everyday New Yorkers, or rather on the buoyant economy they’ve created and surprisingly limited new construction they’ve permitted.

New York City specifically Manhattan remains stable, with only slight concentrations of new deliveries on the upper west side… However, with population in the metro achieving the new high of 8.4 million people, a pick up in business and professional service jobs, and the continued growth in jobs away from financial services, New York should produce four-handle revenue growth supported by an expected 155,000 new jobs in 2015.”

3. The era of “boomtown DC,” the city of Fox News nightmares where Barack Obama used government debt to hand out Obamacare-regulation-writing jobs like candy, appears to be ending. Or maybe it never existed: much of the District’s population growth turns out to be just the usual machinations of a large metropolitan area rearranging itself — in this case, as with many others, centripetally.

The district itself continues to see outsized population growth and 25% of our district move-ins were from folks moving closer in from Virginia and Maryland…

Not that this particular phenomenon is unique to DC, of course; Equity boss Sam Zell has noted a broad-based “increasing demand for housing in the urban markets.

The centripetal pattern also applies to the usual flow out from cities, which has been stanched in recent years:

The recession diminished this flow. Fewer than 23,000 young adults left New York annually between 2010 and 2013. Only about 12,000 left Los Angeles—a drop of nearly 80% from before the recession. Chicago’s departures dropped about 60%.
Young adults who moved to the three cities for school, internships or early jobs—or simply because it seemed cool—may now be stuck, said William Frey, a demographer at the Brookings Institution… In tough times, finding well-paying jobs may be easier in big cities, offsetting their relatively high costs of living.

This would be a terrific smart-growth opportunity to capture more population in resource-efficient, highly-productive, low-footprint urban areas — if only said cities were more affordable!

——-

While I’m quoting at length, and because it’s marginally relevant, Old Urbanist wrote up this useful comparison to how America’s zoning system systematically creates bountiful affordable housing… for cars:

American states and cities have engaged in onerous mandatory inclusionary zoning for cars (parking minimums), zoning exemptions (e.g. not counting garages toward FAR limits and allowing parking, but not housing, in mandated setbacks), tax exemptions (only 16 states maintain a personal property tax that covers automobiles) and fringe benefits (the commuter parking benefit), in addition to rent-free public housing for cars (overnight on-street parking).

Abundant housing supply moderates prices, but only drastic oversupply cuts prices

Daniel Kay Hertz assembled a few current examples of how overbuilding in the rental apartment market is keeping rents down.

South Michigan

Market-rate and affordable apartments under construction side by side in the South Loop.

A commenter pointed out that the South Loop multifamily market cratered in 2009 — and more broadly, the downtown Chicago market was flat over the entire 2000-2010 real estate cycle. People who bought some of the first Loop loft conversions have not earned more than the rate of inflation. In 1999, the buildings at 208-212 W. Washington St. were purchased for loft conversion, which was truly unusual then. (I worked just a few blocks east, and was in the market for a condo when it was closing out.) Today, 212 W. Washington St. #2108 is on the market for $395,000, less than the $414,411 that its $319,000 sale price in 2002 inflates to. Other properties in the building have recently sold for less than their 2001 nominal prices. This is despite a “hot” market that’s “running out of condos.

(I brought up this example during the Height Act battle, when some obtuse conservatives claimed that skyscrapers caused, rather than merely correlated with, high housing prices in Manhattan. Well, Chicago builds more skyscrapers, which allows its downtown housing supply to match growing demand.)

More broadly, the entire 2008 financial crisis is one big national case study in house price decline. Namely, it’s the prime example of why house price declines are rare: housing is so highly leveraged, and so central to household wealth, that falling prices really hurt the entire economy. As Ryan Avent writes: “since buyers are heavily leveraged, losses in value are magnified, raising the risk that price declines become crises.”

In a Brookings post-mortem [PDF] on the 2008 crisis, Karl Case (yes, of Case-Shiller) notes that broad housing price declines are rare: “nominal prices never fell over any full quarter between 1975 and 2005,” and that fact gave bankers’ computer models undue confidence in ever-rising prices. Moderate oversupply rarely results in falling prices because housing markets have other ways of discounting — sellers trade time for money and just wait it out:

Another important aspect of housing market efficiency is that prices tend to be sticky downward. In most markets, when excess supply develops, prices fall quickly to clear the market. But housing downturns have been characterized by sticky prices. Sales and starts drop but prices are slow to respond…
Downwardly sticky prices lead to “quantity clearing markets” rather than “price clearing markets.” […] Demand drops. The inventory of unsold homes rises. Prices stick. Output falls. The inventory of unsold property remains high (because a house is a durable good, not a consumable). But household formation rates remain positive, and the new households eventually absorb the excess inventory and output rebounds. Assuming there is upward inertia, prices then rise and ultimately overshoot; demand again slows, starting the next cycle.

For rented real estate, contract rents are only one way to set prices. Other ways of discounting abound: free months of rent, tenant improvement allowances, improvements to fixtures or common areas, bundled services (like utilities), additional amenities, and outright gimmicks can effectively act as “discounts” even while nominal rents don’t decline.

Case also mentions that housing is a heterogenous good, where each property is different. In real estate markets, that usually plays out as a “flight to quality” where prices hold up for the best buildings, and prices fall for lesser locations and uglier buildings. This phenomenon has dampened urban dwellers’ memories of the 2008 crisis — they’re less likely to remember the price decline, since “home values have generally held up better the closer a home is to the city center.”

At a local or regional level, though, housing prices do decrease on a pretty frequent basis, and over-supply is usually why. In “Why Do House Prices Fall?,” a pre-crisis paper written by Daniel McCue and Eric S. Belsky for the Harvard Joint Center on Housing Studies, the authors found that severe overbuilding almost always leads to housing price declines.

“While only about a third of all spells of moderate overbuilding resulted in price declines, nearly two out of every three spells of severe overbuilding resulted in price declines, and eleven of the twelve spells of extreme overbuilding resulted in price declines, all of which were large.” [emphasis added, extraneous definitions omitted]

housing price declines

The graphs do appear to vindicate the notion that market forces alone can, without subsidies, cause housing prices to decline. The housing-permit equivalent of a 300-year flood will almost guarantee that prices will drop by around 15%.

McCue and Belsky note that such overbuilding has basically disappeared from major cities in recent years, though. Instead, these cities have extirpated the rare beast and now systematically underproduce housing. Since nobody can remember prior oversupply crises, they now feel free to deny that such a thing is even possible.

Note that of the three major factors McCue and Belsky tie to house price declines, overbuilding is implicated more often than either employment loss or overheated prices. Just high housing prices on their own rarely led to corrections; because housing prices are sticky, high prices just plateau for a while.

housing price declines

Even in the realm of luxury goods (which some wrongfully claim that housing is), a good old supply shock is always eventually able to bring prices back into line. Here’s the supply and price of Maine lobsters, whose prices collapsed as the recession cut demand for ostentatious restaurant meals, but where growing supply has kept prices down even as demand rebounded: “Lobster, long considered a luxury, is becoming a little more ordinary.”

lobsters

Sadly, San Francisco has underbuilt to the point where it would take a a 26% increase to its current housing stock to get the market back into balance.

Shorts: Critical Masses

Critical Mass I Ching

A few short topics for January, all around the theme of achieving critical mass in three very different markets for metropolitan services.

1. Nathan Donato-Weinstein, reporting for the Silicon Valley Business Journal about Google’s October purchase of buildings along San Francisco Bay:

Google — which like many expanding tech companies is focused on reducing its car and shuttle trips as traffic worsens during the current boom — may be eyeing transit options beyond freeways. Pacific Shores is a half mile from the Port of Redwood City, where a Google pilot project earlier this year tested running ferries from San Francisco and Alameda to the port. The Water Emergency Transportation Authority, which administers the San Francisco Bay Ferry routes, has studied regular public ferry service to Redwood City, with a potential public terminal practically next door to Pacific Shores.
“I know they really liked the ferry and the concept. Their challenge was getting people off a boat and putting them on a bus to Mountain View, and that was taking 25 minutes,” said Kevin Connolly, director of planning and development for WETA. “This might be one way to address it.” […]
A Redwood City terminal would cost about $15 million. But the county doesn’t have ongoing operational funding, Connolly said.
A major built-in user such as Google could help make service pencil out, he said.

I’ve written critically about the peculiar geometries (and thus poor economics) of water taxi transit before. Having high-density development built on landfill immediately adjacent to a deep-water port certainly solves some of those problems — but a ferry does need at least two ports. However, most other Bay Area jurisdictions have incredibly restrictive development policies along their waterfronts, and many of the Bay Area’s most desirable residential areas are well inland (and atop hills, in fact).

Perhaps last-mile bus service would supplement a 101-bypassing ferry on one or both ends. That adds in the time and hassle of a transfer; when combined with a lower peak speed (around 40 MPH) and increased susceptibility to inclement weather, it’s tough to see how it would be a faster, more reliable, or more fuel-efficient option. (2008 figures submitted to FTA, as reported by Wayne Cottrell in Energies, indicate that ferry operators in the USA have a median fuel economy of about 10 seat-miles per gallon of fuel.)

2. General Growth Properties plans a $2 billion investment in street retail, ultimately aiming to have 15% of its portfolio invested on high streets in the principal gateway cities of NYC, Chicago, Miami, Boston, DC, SF, and LA. Even in these high-rent areas, GGP sees “assets with significant unrealized growth potential,” with below-market rents and under-used vertical space.

General Growth Properties investor presentation slide

Many office REITs have focused on CBD office, but these properties have historically been neglected by large retail REITs. Adjacencies matter much more with retail than with office, which creates a “commons” problem that undermines streets with fragmented ownership.

GGP has hinted at two approaches to circumvent this. Like Acadia Realty Trust (an exceptional retail REIT that has redefined itself as a high-street owner), it might hope to aggregate enough properties to create its own mall-like ecosystem, and thus internalize the external benefits of its investment. GGP’s first big investment, an equity stake in the Miami Design District, certainly has that advantage. However, the DD is a singular example unlikely to be replicated elsewhere, so it appears that GGP will instead have to rely upon its high-rent neighbors to similarly aggressively upgrade their properties.

This could be a long waiting game, though, since a lot of urban property isn’t owned by others who need the same quick upside that a REIT does. Micah Maidenberg quotes a skeptic in Crain’s:

“The street-retail business, just like luxury hotels and other sorts of high-end projects, tend not to be a quarter-to-quarter-growth kind of business. It’s more of a long-term hold,” says Jeffrey Donnelly, a managing director at Wells Fargo Securities in Boston.

3. Two few weeks ago, I was visiting my parents in North Carolina and feeling under the weather. While looking up my out-of-area health care options, I came across an instructive article in Milbank Quarterly (by Daniel Gitterman, Bryan Weiner, Marisa Elena Domino, Aaron McKethan, and Alain Enthoven) about why Kaiser Permanente’s integrated group medical practice failed in the Triangle — where I’d previously been a satisfied customer.

My main takeaway from the case study was that, while “prepaid group practices” like Kaiser or GHC in Seattle (not to mention vertically integrated government systems like the VA) do offer tremendous cost efficiencies, they also rely on economies of scale that are difficult to set up from scratch.

The article estimates that KP’s break-even point is around 100,000 members in a metro area. That figure would have been a huge ask, given that the Triangle’s population was well below a million at that time, and spread out across a broad area. KP needs that kind of scale to build bargaining power, both:
– on the cost side, when bringing services in-house (the essential feature of their cost-containment model) or bargaining with hospitals and specialists; and
– on the revenue side, when selling their product to employers and employees who have to be sold on a choice that (a) most would find less convenient and (b) involves disrupting the “stay with my doctor” inertia many customers have.

It’s not a coincidence that prepaid group practices are best established in markets where either government employees or unionized employees bulk-purchase healthcare services. But HMOs are beginning to re-emerge now that the Triangle is bigger and denser, the ACA exchange has made the health insurance market less fragmented, and more doctors have organized into group practices linked to specialists via electronic health records. One new option in this year’s ACA marketplace for North Carolina (and especially valued, since last year only NC Blue Cross participated in the marketplace) is Coventry’s CareLink HMO, which uses Duke Medicine’s primary care network as the in-house practice.

New economic geography: fewer centers, more edges

from a plane

There’s obviously no room to build anything, anywhere.

October’s Economist Survey on the global economy by Ryan Avent included a shout-out to his Piketty-informed thoughts on housing prices. In short, the productivity gains from current technology have increased inequality between people and places. The returns on specialized skills are worth more in an era of cheap communication and transportation, great cities aggregate many people with such specialized skills –and furthermore, agglomeration effects appear to be growing even as communications costs decline. Even virtual reality won’t be able to replicate the everyday, subtle reinforcement of ambition that great cities provide; as Paul Graham writes:

The physical world is very high bandwidth, and some of the ways cities send you messages are quite subtle… A city speaks to you mostly by accident—in things you see through windows, in conversations you overhear. It’s not something you have to seek out, but something you can’t turn off.

Ideas have become so complex that those with specialized skills need to gather around others with complementary skills just to understand topics, much less to achieve the discovery or innovation stage. And, well, interesting people like one another; not for nothing has “assortative mating” taken off, spawning study of managing “the two-body problem” in fields like academia and medicine. (Hint: bigger cities, with bigger labor markets, are more likely to solve the problem. This has become a boon to universities recruiting in large metro areas, while those in small college towns struggle.)

In short, there are fewer centers and more edges. Scarcity being what it is, the centers (and only the centers) are winning more capital, and the edges are losing.

The result has been a highly uneven reallocation of wealth, whereby some places are winning in the form of skyrocketing property prices. These high prices create a substantial drag on the economy: increasingly high rents in the most productive locations steal from the most productive. This steers:

  1. Capital towards landlords, enlarging a rentier class (as Piketty notes) and starving more productive sectors.* This creates a vicious circle, as the NIMBY cartel further tightens its regulatory capture over the land use regime, and extracts ever-higher rents.
  2. Labor towards less costly, and less productive, places, creating economic losses. One recent study quantified that economic loss to the United States in 2009 at 13% of GDP — equivalent to sawing off the entire state of California.

—–

This might be worth unpacking further at a later date: Just reforming land-use regulations, or even entirely repealing the “shadow tax” of zoning, still won’t do enough to produce more affordable housing. Even if zoning is reformed to “make more land,” that land’s still subject to construction’s “hard costs,” which are just too high nowadays.

Construction costs have risen faster than inflation, and far faster than stagnant workforce incomes. Slides 5-6 of this presentation [PDF] by Thomas Hoffman from Enterprise points out that even with free land, even the cheapest construction now costs 50% more than the affordable rent for a low-income family.

Sure, embedded within construction costs are other perhaps-useless regulations, but housing affordability in gateway cities is a problem with many root causes, and with many solutions as well.

—–

* Rent or mortgage principal paid, aka “housing service expenditure,” does not have a multiplier effect on GDP because it’s not factored into GDP. However, it’s worth noting that in 2000, HSE amounted to nearly $1 trillion, which supported only some of the 1.1 million jobs in real estate (NAICS 531). Reducing rental prices would take investment income from landlords and give them back to consumers, who would probably spend in other sectors that generate more jobs per dollar.

Shorts: centripetal force, P3s, office park retrofit

Bubble map: growth in 25-34 population, 2010-2012

Growth in 25-34 population for DC-area counties, 2010-2012, with core jurisdictions aggregated for clarity. 42% of the growth is concentrated inside “the diamond,” which is home to 18% of the region’s population. A similar trend was noted in metropolitan NYC.

1a. Another recent report (by James Hughes and Joseph Seneca, reported by my colleague Stephen Miller) confirms that population growth has overwhelmingly shifted towards the core in the New York region since 2010. Third-ring suburban counties like Dutchess and Hunterdon are actually losing population, overall suburban population growth has slowed by 80% — and the core is on pace to recoup its entire 30-year postwar population loss (1950-1980) in just one decade (2010-2020).

Also echoed: a much larger proportion of young people (20-somethings) are heading downtown. “From 1970 to 1980, suburban counties captured 96 percent of the growth in this demographic. From 2010 to 2013, that figure dropped to 56 percent, with the urban core becoming increasingly competitive.” Since the report is from Rutgers, it defines “core jurisdictions” as including Hudson, Bergen, and Essex counties.

We’ve seen these trends reported in a national (PDF) and even DC context, but it’s worth noting since the NYC area is so huge and its economy has done well since 2010.

2. This week fall, Streetsblog USA will be publishing a three-part article I co-wrote with Angie Schmitt about what befell the Indiana Toll Road P3. Bad timing and bad traffic projections were just the tip of that iceberg.

3. Jonathan O’Connell from the Post reported last week that a new Fairfax County school was repurposed from an abandoned office building.

It’s a clever response to the changing Skyline/Bailey’s Crossroads neighborhood, where an aging housing stock and distance from transit have created a Toronto-esque high-density suburban immigrant enclave. Larger immigrant families have pushed up population density and school enrollment; retail is thriving, judging from the continued traffic jams and low vacancy rates. At the same time, office users have engaged in a “flight to quality,” towards newer and more efficient buildings closer to transit.

What’s more, the cost was very competitive. Fairfax spent $19 million in 2014 to buy and refit the building for 800 students (granted, a few amenities are still forthcoming) — which is right around the national median cost for a greenfield grade school in 2010.

LocationAffordability’s denominator problem

Location Affordability: numerator problem

HUD’s LocationAffordability.info, which maps CNT’s H+T Index ([housing + transportation costs]/income), shows a sharp affordability divide slicing across Maryland’s suburban heartland, from the northwest to the southeast. This particular example emerged while I was researching yesterday’s Streetsblog USA post about the Citizens Budget Commission’s report citing DC, SF, and NYC as being rather affordable from an H+T perspective — but using some slightly odd figures.

Here, I’ve highlighted Crofton, Maryland, just inside Anne Arundel County, with apparently more affordable Bowie just inside Prince George’s County next door. Curiously, though, costs are $700 higher in Bowie, but it’s still deemed “more affordable.” How? Prince George’s is within metropolitan Washington, where median households have incomes $10,000 higher than in metropolitan Baltimore, which includes Anne Arundel.

The added irony: median household incomes in Anne Arundel (again, metro Baltimore) are quite high: $14,000 higher than in Prince George’s. Similarly, Howard County (Clarksville, Columbia) is Maryland’s wealthiest, with median household incomes $12,000 higher than in neighboring Montgomery (Olney, Gaithersburg). Although Anne Arundel and Howard derive much of their income from their legions of Washington commuters, they do border Baltimore County and the Maryland state legislature has designated them as part of metro Baltimore. Thus, for the H+T Index’s purpose, they’re comparatively deprived.

The H+T Index is a useful tool, but it does rely on a lot of moving data points. In this case, it’s a bit strange that the numerator (H+T costs) are defined by a very small geography (census tracts in the map, cities in the CBC report), but the denominator (income) is related to entire metro areas. While it’s true that labor markets are metropolitan in scale, it’s also true that incomes vary locally just as much as housing and transportation costs do.