This post is not by Andrew. This post is by Phil.
A few days ago I posted What’s the deal with the YIMBYs? In the rest of this post, I assume you have read that one. I plan to post a follow-up in a month or two when I have had time to learn more, but there are a couple of things I can say right now.
- I apologize unreservedly to YIMBY supporters who know, or think they know, that buiding more housing in San Francisco will decrease rents there or at least will greatly reduce the rate at which they rise. I characterized the entire YIMBY movement as being at least partly motivated by a desire to stick a thumb in the eye of the smug slam-the-door-now-that-I’m-inside NIMBY crowd, rather than by a genuine belief that loosening land use restrictions in SF will decrease rents there. This was simply wrong of me.
- There might be something else I need to apologize for too, I’m not sure. (I don’t remember whether or not I said this in the comments; I’ve taken a quick skim through and didn’t see where I said it, but maybe I did). I have seen a few articles that touch on Bay Area housing, and the YIMBY movement, in which people who characterize themselves as YIMBYs say things like “we aren’t talking about turning San Francisco into Manhattan, we are talking about building some more housing to take the pressure off so rents come down.” [That is not a quote, it’s a paraphrase.] I think that in the current economic environment you would need to build an enormous amount of housing in SF to get the price to come down, so I’ve felt that people who say things like that are being disengenuous. It’s possible that I characterized the entire movement incorrectly, based on those examples. If I did, then I apologize to people like Sonja Trauss, who is a leader in the YIMBY movement: Sonja is absolutely up-front about wanting to build however much a free- or nearly-free market would allow, even if this does indeed lead to the Manhattanization of San Francisco. Trauss is not being disengenous at all, there are others in the movement that are also straightforward about the fact that their desired policies might completely transform the city.
- I’m also sorry that I wrote authoritatively rather than speculatively. What I should have said is “Here’s what I think is happening, and I’d welcome comments” rather than, in essence, “Here’s what is happening, and I welcome comments.”
II. Not Sorry.
I proposed a model for San Francisco housing prices that makes sense to me. Quite a few people posted that my economic model is nonsense and I’m an arrogant fool, or worse, for having proposed it…that I should be embarrassed… etc. But not only do I not think I’m arrogant, I think some of the people who accused me of being arrogant are themselves arrogant. (As for whether I’m a fool, that’s possible but I am not convinced).
Before I get into just a bit more discussion of the economics, let me touch on a few things about the comment stream.
- Many people mischaracterized my argument, claiming that I don’t understand the simple “law of supply and demand” , that if you build more of something it gets cheaper. But I do understand that, indeed I said it explicitly in the fifth paragraph of my post! If you build more housing, housing gets cheaper on average. I said that and I believe it. I just believe that the place you build the housing isn’t necessarily the place it gets cheaper, for reasons I explained.
- Several people claim that my model — actually I will admit it is an incomplete model, so I should perhaps put it in quotes — that my “model” predicts that when new high-income housing is built in San Francisco, it will be occupied only by newcomers to the city. This is not true. I do think that if N new expensive housing units are added to the city, the population of the city will go up by nearly N high-income households, but this could happen even if current high-income residents move into the new units, as long as their former residences are taken by high-income residents from outside. Some people think I am very wrong about this — they say if N new high-income units are added the number of high-income households will go up by much less than N. One of the people who says I’m wrong is a noted economist, a fact that certainly gives me pause. But I will explain below why I am unwilling to simply accept the judgment of the economist, absent an actual economic model that captures the key characteristics of the system.
- A commenter named Sam pointed out a blog post by economist Nick Rowe in which he demonstrates that local housing demand curves can slope upward — that is, building more housing can lead to higher housing prices, at least over some range of housing density — even if one ignores the distorting effects of land use regulation. Rowe does not claim that this actually happens, he merely points out that under some reasonable assumptions, it could. Well, if it could, maybe it does. However, I must admit that although I said in a comment that Rowe’s model ‘is more or less what I think is happening’, upon reflection that is not true: my ‘model’ is based on the fact that the Bay Area housing market is trapped by regulations in a state that is very far from the free-market equilibrium, whereas Rowe’s model assumes a free market. Still, the effect Rowe posits could be an important part of real-world behavior. People who say I’m obviously wrong — that an increase of housing supply in San Francisco might lead to an increase in housing prices there — might want to read Rowe’s post and ask themselves if they are really really sure.
- Several commenters said I am ignoring a large body of published work that clearly proves I’m wrong. This is one of the main pieces of evidence that supposedly proves my arrogance or ill-will. All I can say here is that if I am ignoring such published work it is because I’m ignorant of it in spite of looking for it. If economists have indeed looked at the economics of housing in a Bay-Area-Type situation, my default assumption would be that they have done it right. But I still haven’t seen such work.
#4 requires an explanation. When I said I haven’t been able to find relevant work in spite of looking, I got a few incredulous comments along the lines of “How could you possibly have missed the work of X”. In a couple of cases I actually had seen at least some of the work; in others I had not. But even though I have now looked at some of the papers to which I was referred, I still have not seen what I’m looking for, which is a housing price model that would predict what will happen if you build some new high-income housing in San Francisco. I think that what these commenters are referring to is the large number of publications on regulatory restrictions on housing prices. For instance, there’s a fair amount of work that compares housing prices across different metropolitan areas, and demonstrates that highly regulated areas with high economic growth have much higher housing prices that less-regulated areas with high economic growth. (When I say ‘highly regulated’ I am referring to land use regulations that limit the construction of new housing). An example, to which economist Steven Berry referred me, is “Urban Growth and Housing Supply”, by Glaeser, Gyourko, and Saks. These are all real heavyweights, and if they had a model that applied to the Bay Area housing system I would be inclined to take it at face value, unless they made obviously questionable simplifying assumptions or something. But in fact that paper explicitly looks at entire metropolitan areas. Housing prices have gone up more in the San Francisco Bay Area than in Las Vegas, and land-use regulations are surely part of the reason… that’s fine, and makes sense, and I don’t dispute it. (I also note that the uncertainty on the magnitude of the effect is extemely large). But I could not find anything in that paper that I think even the authors would suggest can be used to predict what would happen if you have several highly-regulated cities in the same metro area, and you relax regulations somewhat in one of them. I have looked at the work of several other authors who were mentioned by commenters, and so far have not found anything about such a system. I do not claim it doesn’t exist.
Quite a few critics of my post said (paraphrasing): “you obviously know nothing about economics, because even the basic supply-demand relationship you learn in Econ 101 disproves what you say.” One of the people who said this is the aforementioned economist Steven Berry, who posted a response that began with “1. Go to ebay and buy a used intro microeconomics textbook 2. Read the chapter on supply and demand” and then laid out the standard free-market equilibrium model of supply and demand, which, ironically, is about the only thing I do remember from Econ 101. He then points out the undisputed fact (undisputed by me, anyway) that under the assumptions of that model, an increase in the demand for housing in San Francisco will cause a lower price increase if more housing is built in San Francisco than if it isn’t.
But…but…but…if even an Econ 101 student were to propose modeling the current Bay Area housing market as a free market that is near equilibrium, surely Berry would give him a very poor grade. If the Bay Area housing market really worked that way, there would be no need for a YIMBY movement and indeed no point to having one. The whole point of the YIMBY movement is that the difficulty in building new housing has moved the market far from free-market equilibrium and is holding it there. This applies to the whole Bay Area, but since demand is highest in San Francisco the effect on housing prices has been especially large there. I think it’s just wrong to look at a system like the one we have, and apply a model that assumes we are at equilibrium in an environment where additional housing can be built instantaneously at the construction cost. So I pointed that out to Berry. And Berry told me to quit bothering him and go pound sand.
No, actually he didn’t. He said “You treat the supply side as fixed, which as you say given the NIMBY success is maybe first-order correct…” And then he went on to suggest how to model a system like this, and gave a reference to a relevant paper (which I have not yet looked at, but will). On the whole he put in quite a bit of time writing several comments, and I appreciate it. Berry still said I’m an ignoramus, and questioned both my motivation and my character, but on the whole I think his behavior has been quite good: he didn’t just call me names, he made constructive comments and pointed out where he believes I have made an error. This certainly contrasts favorably with the behavior of some of the other commenters, who simply referred to the inappropriate free-market model and refused to even consider the fact that it is a terrible model for the actual market here. This is what I meant above when I said “I think some of the people who accused me of being arrogant are themselves arrogant”: if you are one of the people who gave a knee-jerk shout-out to the free-market-equilibrium model and then dropped the mic, you are in this category. Kudos to Berry, who I think was the only one to acknowledge that that model is (or at least may be) inappropriate, and to give actionable advice on how to create a reasonable model.
I’m reminded of a brief anecdote in Landsburg’s “The Armchair Economist.” Landsburg recalls a fellow economist posting a bunch of questions that he claimed were interesting — things like “why does candy cost so much at a movie theater” — and that Landsburg and some of his buddies sat around making fun of the questions, and the guy who posed them. Landsburg says he thinks they laughed some of them off by simply saying “supply and demand!” But, as he was writing the book years later, Landsburg said he now recognizes that he and his buddies were wrong, and that the answers to the questions are in fact non-trivial and that the questions really are interesting.
To get back to the economics model: Berry does not claim to have a model of the system we actually have, or at least he didn’t claim it in the blog comments. He nevertheless claims that building N high-income apartments in San Francisco will not, in fact, result in approximately N new more high-income households moving there, but rather some number very much less than N. He’s an extremely competent economist and I am not, so I take his intuition on this subject very seriously. But I don’t think I need to apologize for not simply accepting his intuition, or anyone else’s. I think we agree the equilibrium model is not a reasonable one to use. So what is a simple model that can be used?
So, I am not sorry for not simply caving to the people who are calling me an idiot, especially the ones who beat me over the head with an inappropriate model and then stalked off!
I will post again when I can figure out whether or not I really am completely wrong. Or, if I can’t figure it out, I’ll say that.