Your point about Del Ray is interesting because it illustrates how much people with money are willing to pay to live in a particular kind of neighborhood that has been illegal for 80 years. and that they are willing to tolerate small spaces and very substandard actual buildings for that surrounding experience.
A powerful YIMBY move would be for us to legalize and then start building new “streetcar suburbs.” It’s difficult in our existing metros because you’d need a quantity of land that only exists on the periphery, and short commutes are one of the key features of the streetcar suburb. But when New Urbanist developments get built far out they still tend to sell well.
IMO that’s an underrated part of the shortage. We need more units period, and an all of the above strategy is called for, but the *biggest* mismatch between supply and demand is in that missing middle where you can own a home or townhome and still walk to “main street.”
Those old Sears homes may be in lots with poor drainage and may still have knob and tube wiring, but the level of craftsmanship surely beats modern day Khrushchevkas. People want to live in places with that level of architectural detail, we have to find a way to drive labor costs down
Great article Luca! Really hit the nail on the head.
I have a theory that I'd love to see you take a deeper look at: that housing shortages increase transaction costs for tenants/buyers while reducing them for landlords.
For the landlord, the costs of finding a new tenant are very low. Worst case; the unit sits empty for a few months, and even then the landlord can use this time do maintenance or improvements.
For the tenant: the costs/risks associated with finding a new apartment are astronomical. Worst case is literal homelessness. Median case is probably finding a worse unit for the same price.
The asymmetrical risks associated with ending a tenancy allows the landlord to pass almost all of the potential transaction costs on to the tenant in the form of higher rents.
Maybe that's all already baked in to your model, but I think it could be worth exploring at a deeper level.
Thanks Seth! I see what you are getting at. It is an important issue, but also I think fairly straightforward. The housing market is essentially a seller's market, sellers have a lot of pricing power. As you say, we can also see large numbers of people bookmarking a given property on real estate search engines and literal lines out the door to view an apartment. To me it all comes down to power. This environment gives landlords a lot of power, which at an extreme results in vulnerable people in overcrowded conditions. Happy to hear any additional thoughts you have about this.
But there's always a transaction cost to moving. For renters, it can take a lot time to find a new place, plus the time/energy/money to pack up all your stuff and physically move.
The landlord also has a cost to finding a new tenant. A) time/energy it takes to find someone suitable.
B) potential loss of income from the unit being unoccupied.
For example: say the "fair market price" for a certain occupied unit is $2500. The landlord raises the rent to $2700. The tenant now has to decide if that extra $200 per month is worth the cost of moving.
If the tenant moves out, they have to accrue the cost of moving. And they're also accepting the risk that there literally might not be anywhere to move to. Or that they get stuck in one of the hellholes that you mentioned in your article.
For the landlord, worst case scenario is that they just re-list the property at the market rate and easily find a new renter within a month or 2.
For the landlord, 1 month without a tenant is no big deal. Cost of doing business. For the tenant, 1 month without housing is absolutely devastating.
This is what I mean by asymmetrical risk. I suspect many people are stuck paying higher than market rents because they aren't willing/able to manage the cost required to move.
But as you said, it all comes down to leverage. And the best/only way to give tenants more leverage is building more housing.
In most housing shortage cities, tenants have too many rights as is! They trash places when they know they’ll be evicted because they’re given so many days notice.
I think the answer here is pretty simple and very encouraging. Let's say you hit a hard limit of $300,000 per unit, something like that. That is the price of a new unit, but old stuff can and will still be less expensive. The questionable old homes I mention in Del Ray are a good example.
Some anecdata from my small (desirable location) suburb. About 15-20 years ago, a townhouse/apartment community that was built in the early 1960s as a luxury community was torn down for modern-day luxury apartments. The original community was the most affordable place to rent (at the time 2BD apt <$700/mo, really good for this immediate area). The new units rented at $1200/mo, which displaced all the working-class people who lived there originally. We started seeing panhandlers at the intersections on the main road past the development, and it is still that way today.
I'm not saying this to argue against anything you or the linked video (which is fantastic btw, have passed it on to others) are saying. It just hurt to see the affordable housing get obliterated. Maybe this decision will have a positive long-term effect (it hasn't locally yet), but it would be nice to see maybe some decaying commercial property be the target of destruction for a change (around here).
Smart piece! The problem with option 1 that I see is that the new housing stock with high rents can sit empty for a while. I live in the Huntington area of Alexandria and we have a ton of new buildings going up. They are filling slowly. The new affordable housing building was full instantly. You are right, it doesn't scale. That makes me wonder how we can bring down the cost of creating the housing.
Lots to ponder here. I would love more fine grain detail on Minneapolis and Austin's housing over the past five years. Where the housing was built, how many units, how the new housing compared with existing stock in terms of price, etc. It would be great if we could get some deeper analysis of that housing and lessons from it beyond just the main headline of "build more housing."
This all makes sense, and a group I am in here in Boston is taking thia approach. But one honest question that I struggle with - with the high cost of construction (which we are trying to decrease in the ways policy can decease them), doesn't increasing the supply hit a limit fairly quickly? Rents come down, as your Austin graph shows, but builders will stop building when they can't earn enough profit to cover their costs. I don't know if that's what we are seeing in the Austin graph, but I read one Austin blog by a real estate finance guy that said the market for construction there is not good now due to over supply. So yes, rents come down somewhat, which is good and the point of more building. But is there a limit, and is that above what a lot of people in Austin can afford? Any thoughts about that? I sometimes think Yimby's are too optimistic that we will just keep building supply to solve the crisis. It seems to be a very wicked problem. The suburbs solved it temporarily in the mid 20th century by just going out further and further on cheap land, subsidized by federal policy. But there's a limit to that as well, and an extraordinary external cost.
Your point about Del Ray is interesting because it illustrates how much people with money are willing to pay to live in a particular kind of neighborhood that has been illegal for 80 years. and that they are willing to tolerate small spaces and very substandard actual buildings for that surrounding experience.
A powerful YIMBY move would be for us to legalize and then start building new “streetcar suburbs.” It’s difficult in our existing metros because you’d need a quantity of land that only exists on the periphery, and short commutes are one of the key features of the streetcar suburb. But when New Urbanist developments get built far out they still tend to sell well.
IMO that’s an underrated part of the shortage. We need more units period, and an all of the above strategy is called for, but the *biggest* mismatch between supply and demand is in that missing middle where you can own a home or townhome and still walk to “main street.”
Those old Sears homes may be in lots with poor drainage and may still have knob and tube wiring, but the level of craftsmanship surely beats modern day Khrushchevkas. People want to live in places with that level of architectural detail, we have to find a way to drive labor costs down
Great article Luca! Really hit the nail on the head.
I have a theory that I'd love to see you take a deeper look at: that housing shortages increase transaction costs for tenants/buyers while reducing them for landlords.
For the landlord, the costs of finding a new tenant are very low. Worst case; the unit sits empty for a few months, and even then the landlord can use this time do maintenance or improvements.
For the tenant: the costs/risks associated with finding a new apartment are astronomical. Worst case is literal homelessness. Median case is probably finding a worse unit for the same price.
The asymmetrical risks associated with ending a tenancy allows the landlord to pass almost all of the potential transaction costs on to the tenant in the form of higher rents.
Maybe that's all already baked in to your model, but I think it could be worth exploring at a deeper level.
Thanks Seth! I see what you are getting at. It is an important issue, but also I think fairly straightforward. The housing market is essentially a seller's market, sellers have a lot of pricing power. As you say, we can also see large numbers of people bookmarking a given property on real estate search engines and literal lines out the door to view an apartment. To me it all comes down to power. This environment gives landlords a lot of power, which at an extreme results in vulnerable people in overcrowded conditions. Happy to hear any additional thoughts you have about this.
For sure, I'm mostly thinking about renters here.
But there's always a transaction cost to moving. For renters, it can take a lot time to find a new place, plus the time/energy/money to pack up all your stuff and physically move.
The landlord also has a cost to finding a new tenant. A) time/energy it takes to find someone suitable.
B) potential loss of income from the unit being unoccupied.
For example: say the "fair market price" for a certain occupied unit is $2500. The landlord raises the rent to $2700. The tenant now has to decide if that extra $200 per month is worth the cost of moving.
If the tenant moves out, they have to accrue the cost of moving. And they're also accepting the risk that there literally might not be anywhere to move to. Or that they get stuck in one of the hellholes that you mentioned in your article.
For the landlord, worst case scenario is that they just re-list the property at the market rate and easily find a new renter within a month or 2.
For the landlord, 1 month without a tenant is no big deal. Cost of doing business. For the tenant, 1 month without housing is absolutely devastating.
This is what I mean by asymmetrical risk. I suspect many people are stuck paying higher than market rents because they aren't willing/able to manage the cost required to move.
But as you said, it all comes down to leverage. And the best/only way to give tenants more leverage is building more housing.
Real estate is ridiculously risky, so I would be a little careful here, but I think I fully see what you mean now!
In most housing shortage cities, tenants have too many rights as is! They trash places when they know they’ll be evicted because they’re given so many days notice.
But yes a lot of the fees are too high.
I think the answer here is pretty simple and very encouraging. Let's say you hit a hard limit of $300,000 per unit, something like that. That is the price of a new unit, but old stuff can and will still be less expensive. The questionable old homes I mention in Del Ray are a good example.
Some anecdata from my small (desirable location) suburb. About 15-20 years ago, a townhouse/apartment community that was built in the early 1960s as a luxury community was torn down for modern-day luxury apartments. The original community was the most affordable place to rent (at the time 2BD apt <$700/mo, really good for this immediate area). The new units rented at $1200/mo, which displaced all the working-class people who lived there originally. We started seeing panhandlers at the intersections on the main road past the development, and it is still that way today.
I'm not saying this to argue against anything you or the linked video (which is fantastic btw, have passed it on to others) are saying. It just hurt to see the affordable housing get obliterated. Maybe this decision will have a positive long-term effect (it hasn't locally yet), but it would be nice to see maybe some decaying commercial property be the target of destruction for a change (around here).
Smart piece! The problem with option 1 that I see is that the new housing stock with high rents can sit empty for a while. I live in the Huntington area of Alexandria and we have a ton of new buildings going up. They are filling slowly. The new affordable housing building was full instantly. You are right, it doesn't scale. That makes me wonder how we can bring down the cost of creating the housing.
Vacancy = less pricing power. You might even be watching the market do its thing.
??? But of course. Imposing “affordability” constraints reduces the total
Lots to ponder here. I would love more fine grain detail on Minneapolis and Austin's housing over the past five years. Where the housing was built, how many units, how the new housing compared with existing stock in terms of price, etc. It would be great if we could get some deeper analysis of that housing and lessons from it beyond just the main headline of "build more housing."
This all makes sense, and a group I am in here in Boston is taking thia approach. But one honest question that I struggle with - with the high cost of construction (which we are trying to decrease in the ways policy can decease them), doesn't increasing the supply hit a limit fairly quickly? Rents come down, as your Austin graph shows, but builders will stop building when they can't earn enough profit to cover their costs. I don't know if that's what we are seeing in the Austin graph, but I read one Austin blog by a real estate finance guy that said the market for construction there is not good now due to over supply. So yes, rents come down somewhat, which is good and the point of more building. But is there a limit, and is that above what a lot of people in Austin can afford? Any thoughts about that? I sometimes think Yimby's are too optimistic that we will just keep building supply to solve the crisis. It seems to be a very wicked problem. The suburbs solved it temporarily in the mid 20th century by just going out further and further on cheap land, subsidized by federal policy. But there's a limit to that as well, and an extraordinary external cost.
The extreme but unequivocal example of abundant housing being incredibly cheap is Japan.