Wendell's World: In Housing, Supply Equals Demand

 

Wendell Cox, my favorite anti-anti-sprawl researcher, is at it again. This time, he’s on New Geography, taking on the oft-quoted forecast of Southern California’s future housing market by Professor Arthur C. Nelson of the University of Utah, which found that future demand will be mostly for multifamily housing and small lot (under 5,000 square feet)  detached homes.

And – surprise! – Cox concludes that Nelson is wrong. Future demand in Southern California, he says, will be overwhelmingly on the side of (presumably) large-lot single-family homes. This, of course, is completely contrary to what every other housing researcher has found in recent years – not just for Southern California but for practically every large metropolis in the United States.

Nelson based his projections largely on a series of public opinion surveys conducted by the Public Policy Institute of California and the National Association of Realtors. How did Cox reach his contrarian conclusion? By using the “revealed preference” theory. Revealed preference theory posits that you can figure out what people want by what they buy. And between 2000 and 2008, many more single-family homes were built – and therefore bought -- in Southern California than multi-family homes.

As you can tell, “revealed preference” theory assumes that supply is a pure reflection of demand. If single-family homes were not what people wanted, then developers wouldn’t build them. Right?

Well, in a perfect market, maybe. But people have to live somewhere, and when it comes to housing, they select from among the choices they are offered, no matter what those choices are. This is, in fact, the main criticism of revealed preference – that there is no way to know what consumers would have done if they had been provided with other choices besides the one they had. And, unfortunately, there is probably no product in the United States where current supply more poorly reflects emerging demand than housing, for several reasons.

First, it takes a long time to plan and build housing – sometimes several years, so the connection between supply and demand is already thin.

Second, developers build what their lenders tell them to build, and lenders are like lemmings – they want to build the same thing that sold yesterday. In other words, housing supply often reflects yesterday’s demand, not tomorrow’s.

And third, as Cox himself likes to harp on, developers build what local governments will approve, which means market responsiveness gets all tangled up in regulation and politics. Local governments, seeking to allay concerns of current residents, tend to downzone developers far below housing densities that the market would bear.

Indeed, Cox has devoted considerable effort trying to prove that local regulations foul up housing markets – especially in California. In one recent analysis, he concluded that all differentiation in housing prices nationwide can be attributed to regulation – and that California has the highest housing prices because it has the most onerous regulation.

So which is it? Is the California housing market skewed because of over-regulation? Or is it a perfect reflection of market demand? Depends on which Cox article you read.

More than most researchers, Cox tends to base research on assumptions that reflect his strong world view that sprawl and single-family living are the natural order of things, and that any government intervention in the market will screw up the natural order. As I have pointed out previously, in his piece on housing price and regulation, he concluded that all difference in housing price is due to regulation – but that wasn’t surprising, because he started with the assumption that any difference in housing price must be due to regulation.

Not long ago, Wendell and I debated each other on Larry Mantle’s show on KPCC. The whole reason I was on the show was to talk about my recent L.A. Times piece, in which I argued that sprawl caused California cities to run operating deficits and therefore was bad for those cities’ fiscal solvency. Wendell wasn’t interested in this and moved all too quickly to his comfort zone about regulation. I agreed with him that the land use planning should be more responsive to the market – he liked that – but not two minutes later he was railing about SCAG’s Sustainable Communities Strategy, and how it was going to force neighborhoods that have been 5 units an acre for decades to go to 30 units an acre. He didn’t sound like a market-based economist. He sounded like a cranky NIMBY.

But Cox clearly believes everything he says fits together. Indeed, in a new report that he contributed to – primarily authored by Joel Kotkin and praised by no less than David Brooks – the authors state: “…[T]he dominant trend in urban planning favors restrictions against lower density housing favored by families, essentially raising its price.”

Practicing planners and developers of California: Raise your hand if you think the biggest problem with our system of land-use regulation is that it is squelching the market’s desire for residential downzoning!

Meanwhile, as New Geography continues to give Wendell Cox lots of what we used to call “ink,” serious housing experts are urging the nation to confront these changed conditions. On the day after Cox’s piece appeared, the esteemed economist Barry Bluestone, director of the Dukakis Center at Northeastern University in Boston, issued the center’s annual “Housing Report Card”. His conclusion? Millennials are not likely to trend toward suburban living anytime soon. Just keeping up with current trends will require the Boston region to double its multifamily housing construction in the next decade. Actually accommodating economic growth will require a tripling of multifamily construction.

The recent Kotkin report to which Cox contributed, titled The Rise of Post-Familialism, argues that the current trend away from families – toward more singles and couples living in higher densities in urban places – is bad for the economy and ultimately bad for society. This is a perfectly legitimate argument and Kotkin argues it well. indeed, it’s essentially an extension of Joel’s recent shift toward a more values-based position.

But it's an argument about what people should do -- a moral argument, in a way -- not an analysis of what people are doing. There’s a difference between seeing something coming and not liking it – which is what Kotkin does in the report to which Cox contributed – and pretending something isn’t coming because you don’t want it to, which is what Cox does. Whatever you want to call that – advocacy, evangelism, whatever -- it’s not market economics.

Oh, and speaking of “revealed preference,” Bluestone’s numbers say that single-family homes in the Boston area have dropped in price by 20%, while condo prices have held steady. The average single-family home and the average condo are now the same price. This is not an isolated case: Across the U.S., Zillow.com data reveal that suburban fringe housing prices have fallen by a third or more yet prices for homes closer in have held their own if not increased.

The world is changing, but Wendell Cox keeps expecting it to return to “normal”. In Wendell’s World, everybody wants to live in sprawl. But that’s not the world that most of us -- or our kids -- live in anymore.