Demand Supply
Former Editor-in-Chief Ryan Avent writes a weekly column about neighborhood and development issues.
It's nearly two years now since the great Housing Boom of the Aughts© peaked. While prices have leveled off or declined in many places, the affordability of homes in metropolitan areas as an issue has not gone away. In central cities in particular, where the issue of gentrification is most sensitive, prices have shown the most resilience. Certainly, matters haven't changed enough to prompt the local press to put down its "changing neighborhood" story template. None but the coarsest of us wish to see whole neighborhoods displaced at a stroke, but different approaches to the problem of housing affordability come with different costs. What's a metro area to do?
Turn to the economists, of course (or at least this one). Supply and demand is practically a throwaway explanation for price changes, employed with varying levels of actual understanding by journalists with their business writer cap on. Still, the concept has considerable explanatory power. For home prices, one of the principle determining factors is consumer demand. At the level of the metro area, demand is driven by economic vitality more than anything else, but things like environmental amenities ("sunshine") and cultural options are important as well. At a neighborhood level, demand is affected by things like location, the crime rate, location, school quality, housing quality, location, and retail and entertainment options. Observers of housing markets tend to get this side of things pretty well.
But just as important to prices is supply. Recent economics research has shown, unsurprisingly, a connection between the number of new building permits issued in a location and housing prices. That connection is generally reflected in the Washington area. Where Arlington and Alexandria, long the stingiest jurisdictions for new construction, also have high average home prices, exurban counties like Prince William and Loudoun have had a build anything anywhere approach and were, until recently, rewarded with rapid population growth and relatively low home prices. That all has begun to change. Over the past few years, those jurisdictions have responded to fears of too-rapid growth by cutting new construction significantly. As a result, population growth has slowed and prices have begun to converge toward those closer in.
Supply in Alexandria (or Prince William County or the District) contributes to supply in the Metro area as a whole, so restrictions on growth -- from government action or resident opposition -- help to reduce home affordability for the entire Washington area. It's an interesting problem that residents often fight new development to protect the character of their neighborhoods, but by limiting development they push up home prices and push out long-time residents, changing the character of their neighborhoods just the same.
Picture taken by dougvansant.
How, then, to help residents deal with the increasing cost of housing? Presumeably, we don't want to try and reduce demand for the area, either by undermining the economy or generally junking up the town. What other options do we have? Rent control is a popular but controversial suggestion. Certainly for those individuals able to get into a rent controlled unit, the benefits are significant and tangible. But because rent control policies reduce the incentive to build new homes, they constrain total supply, meaning that everyone who isn't in a rent controlled unit will face increases in their housing costs.
Subsidies, to residents or builders, are a better option, since they tend to encourage the creation of new supply. This week, the Post detailed the Housing Production Trust Fund, which helps to provide affordable housing by subsidizing construction projects that include affordable units. That's a good strategy to pursue, but it does have the downside of requiring public investment. Better still is an inclusionary zoning strategy, which rewards developers who include affordable housing units with the right to increase the density of their developments. The plan doesn't require major public expenditures, it provides for the creation of affordable housing, and increases overall supply and density.
It's also important to remember that the real cost of housing, as felt by residents, is the total of the home price and the cost, in time and money, of commuting. That's why housing units cost more near Metro, and that's why real estate types like to trot out the phrase "drive until you qualify." One of the best ways to make housing more affordable, therefore, is to improve the quality of local transportation infrastructure, AND to plan new housing so that it works better with transit.
In the end, more people will want to live here than the area can easily accomodate. Growing takes time, infrastructure improvement takes time, and supply will always be a bottleneck on growth. As a result, we can expect housing costs to grow over time, and people -- lots of them -- will be displaced, not just out of the central areas of the city but out of the Washington metroplex as a whole. Barring a national commitment to improving education and the status of middle and lower income individuals, cities will have a difficult time making room for a diverse range of incomes. By combining subsidies with a commitment to increasing density where possible and improving transportation systems, the Washington area can help to reduce the worst effects of housing cost pressures. How well the area moves in that direction will go a long way toward determining what the city looks and feels like down the road.