Housing, A Series: Part 74 - Fleeing prosperity

The past twenty years have been defined by the intersection of two competing developments: (1) the revolutionary rise of the value of cities in human networking, innovation, and productivity, and (2) an inability - after decades of growth, after being designed with tremendous foresight centuries ago for this very purpose - of those cities to allow housing expansion and population growth.

Here is the graph from yesterday's post that shows a tendency for rent to rise relative to other costs during economic expansions and for incomes in the constrained cities to rise in general.

Here is a graph of population growth by decade of several metro area core counties.  LA and San Jose (Santa Clara Co.) saw high growth until the 1970s, and since then growth rates of all the problem cities have converged to a 3%-5% range.  For San Francisco and Manhattan, this is actually an improvement over long term trends.  The population of San Francisco only grew by about 10% from 1950 to 2010.  Manhattan had 2.3 million residents in 1910, which was down to 1.6 million in 2010.  We might expect this sort of depopulation in the rust belt.  But, Manhattan has among the highest incomes and the highest housing costs in the country.

There was some population growth in the 1990s in the other boroughs, but that dissipated by the 2000s.  Generally, the very long term lack of any population growth in New York City and very little in San Francisco suggests that this problem will not be solved by expanding housing in those cities.  Generations have governed under these policies.

The blue lines represent Atlanta, Dallas, Houston, and Phoenix - four large metro areas that do not appear to impose broadly dysfunctional housing constraints.  Those cities have median incomes between the national level of $54,000 and about $61,000.  And population growth tends to be stable and stronger than the national rate of growth.  These cities portray the classical expectation.  Incomes may be slightly above average, along with housing expenses, but the ultimate result is an expansion of housing and an inflow of workers, holding down both rents and incomes.

Los Angeles may be approaching the growth level of the other problem cities, but, at least in absolute numbers, it has continued to accommodate growth.  It is not as pure an example of the problem as Silicon Valley and New York City.  It does have very high rents and home prices, but, it doesn't have particularly high incomes.  It's at about $61,000, similar to Dallas and lower than the other high cost cities.  It could be that housing constraints have been high enough to push rents above the comfortable level we see in unconstrained cities, but not so far as to lead to the sharp population shifts and limited access rents to wage-earners.  Or the main factors could be differences in their population from other sources, with LA taking in immigrants from Mexico while Silicon Valley is more tied to the tech. industry and innovations drawing from Stanford and Cal Berkeley.

Here is a graph of net domestic migration from 2000 to 2007, for selected metro areas, by core and outlying counties.  We can see the general trend toward the suburbs across cities.  At first glance, this looks promising for New York, but such a small portion of the metro area's population is outside the core counties, its outlying growth is not significant.

There are several striking issues visible here.  The two cities with the most out-migration are San Francisco and New York City.  They had more out-migration than Detroit, both with regard to their core areas, which are the country's primary sources of economic opportunity and innovation, and with regard to the entire metropolitan area.  San Francisco is so bad even the suburbs had net domestic out-migration.  Chicago looks similar to Detroit here.  It does not have particularly high average incomes or housing expenses, so while it isn't necessarily in a class with Detroit, its challenges are not related to housing constrictions.

Boston also shows up here with a pattern of domestic out-migration, and I find generally that Boston follows the same pattern as Silicon Valley and New York City, but on a smaller scale and with somewhat less of an affordability problem.

That graph measured net domestic migration from 2000 to 2007.  The next graph is only for the period from 2000 to 2003.  This is a short period, but the rates of migration for the cities included in these Census reports correlate highly with the 2000-2007 numbers, and for this period the Census bureau has a report that covers net domestic migration for the top 20 metro areas.

These numbers also correlate somewhat with broader decadal population changes.  Net domestic migration tends to produce tighter relationships with incomes, housing costs, etc. than the more broad decadal population growth rate.  Partly this might be unfair to the coastal cities because there may be some persistent flow of immigrants into those cities that becomes domestic out-migration as the immigrant populations assimilate.  But, I think the reason the relationship is more clear is because the status value created by the supply constraints bring wealthy foreign tenants and the economic rents caused by housing constraints draw high skilled foreign labor to those cities, which puts more pressure on domestic legacy populations who have to move away due to cost issues.  The difference between Silicon Valley and Detroit, for instance, in this regard is fairly obvious, and the tensions it is creating in Silicon Valley and Manhattan are palpable.  So, I think the net domestic migration measure is the more meaningful one.

Even there, I think there are distortions that cause a distortion in these graphs.  Among the cities with less population growth than average, there are two groups - new economy cities with housing constraints, which can be identified by their high housing costs, and old economy cities without housing constraints, which do not have particularly high housing costs.  The old economy cities still tend to have high incomes, though.  The classical description of what is going on here would be that populations flow to where incomes are higher.  Why aren't they flowing to these rust belt cities, then?

These cities represent the previous generation of new-economy centers.  Housing wasn't particularly common as a limit to broad job market access.  But, in those cities, there were excess profits created by geographic advantages, the legacy of large capital expenses, and the sort of path dependent competitive advantages that accumulate as competition removes less competitive firms.  In those areas, instead of housing, tactics like unionization, higher minimum wages, and local regulatory and tax burdens limited access by outside labor and extracted some of the excess profits of the geographically captured firms for broad local benefits and political nest feathering.

Few are moving to the old-economy cities because of high income employment opportunities, and they don't feel like high income cities.  I think the high average incomes there are probably high mostly due to compositional effects.  Whereas high income workers are moving into places like New York City, it is low income workers who are moving out of the old-economy cities because of lack of opportunities.  Competitive frictions mean that some of the legacy industry still remains, and still provides some excess income to those who are fortunate enough to still be accruing the economic rents that have driven so many others out of town.

I think this is a danger for the new-economy cities.  Will they be the Detroits of 2075?  Can Seoul or Hong Kong end up capturing the cutting edge of the technological niches of the future?  The high costs of Silicon Valley may cause that to happen sooner rather than later.  And, as we see in the old-economy cities, the unraveling of an economy whose members have taken rents as a birthright is not particularly pleasant.  Some of the geographical advantages that originally gave Detroit a competitive edge for automaking certainly remain.  But, they are just not as large as they used to be.  The problem is that rents are sticky, but competitive advantage is not.  The housing problems in Silicon Valley and New York City are having a negative effect on all of us now, but those cities could eventually see consequences much worse than a costly housing market - rot and decline.

The way those graphs should look is that the regression line should be flat or upward sloping.  This is clearly the case in aspirational countries like China.  In China there are massive inflows into the cities, where incomes are much higher.  As the housing stock strains to keep up with the inflow, costs rise.  Eventually, costs equilibrate with incomes.  The less friction there is in the ability to expand housing, the less incomes and costs in the city will tend to rise - population rises instead.

The difference between housing constrained cities and growing cities that aren't housing constrained is stark.  In housing constrained cities, locals complain of poor people getting pushed out of their neighborhoods and rich people ruining the character of the city.  In non-housing constrained growing cities, locals complain of poor immigrants and minorities moving in and ruining the character of the city.  In housing constrained cities, the locals try to block outsiders from housing, and in non-housing constrained cities they try to block outsiders from the job market.

I will have more on this topic in the posts following this one.  Outside these problem cities, the US matches the classical expectation.