I’ve been getting feedback lately on my article in Crosscut about land use as fiscal policy and my response to comments by Councilmember Sally Clark on density around light rail stations in Publicola.
Not all of it has been postive. Aside from the usual sniping from “neighborhood advocates” and others, I have heard more about the worries of overzoning. These aren’t new. Dick Nelson, also a Crosscut writer, has voiced similar concerns about zoning in the comments of things I have written there. The worries range from the idea that by up zoning some areas we’re essentially putting money into the pockets of developers to a more nuanced view that there is a “shadow inventory” being held by developers.
I don’t worry too much about the “over zoning leads to overbuilding” fear expressed by Councilmember Clark and Mr. Nelson. After all I am the Up Zone Cheerleader. The idea that by boosting development capacity now, we somehow create too much inventory in the future just doesn’t seem to make sense.
Here’s my logic, my folkenomics if you will. I am unpersuaded that loosening regulation is going to lead to overbuilding. And if does, I still can’t see that being a bad thing. More housing units would indeed mean a glut. Gluts of anything, whether it’s Transfer of Development Rights or old Goodwill Games T-Shirts, is going to mean a drop in price. Lower prices for overbuilt development around transit stations isn’t a bad thing for me or for density advocates. It just means lower prices, which substantially addresses affordability issues and truly does make living in density cheaper.
But there was one pearl in much of the stuff I’ve heard over the last week from people fretting over too much supply of housing around transit stations. This is a comment, from Publicola’s comments, quoted here in full, from Charles.
The problem with yours and Valdez’s arguments is that dynamics governing supply and demand depend on well-functioning price signals, and price signals in real estate are anything but well-functioning at this time.
Just one example as to why oversupply is a serious issue–there is a well-known phenomenon known as “price-stickiness,” where prices do NOT go down despite oversupply. This is CLEARLY demonstrated in areas like Pioneer Square, where dozens of $400,000 condos sit empty rather than their owners taking a huge bath on selling them for the likely market price of $150,000. There’s no way out of this problem so long as the previous owners are able to hold them–there’s no one willing to pay, say, $375k to nudge the price down slowly.
There’s also the problem of “shadow inventory”, large developer conglomerates withholding properties from the market to artificially boost prices on other properties.
Third, there’s the issue of cash-rich former Microsoft employees and the like who snap up “bargains” for cash with an eye to speculating on them when the market “inevitably” recovers.
In the long run, perhaps this will even out. As John Maynard Keynes said, though, in the long run we’re all dead, too. Sally Clark is right to be concerned.
It’s a great comment. I don’t really agree with the conclusion. But it has an air about it that makes me think Charles has some knowledge of what he’s talking about.
The “price-stickiness” problem is a real one in housing or anywhere else. If a person bought a condo 5 years ago for $400,000 but can only fetch $375,000 then yes, indeed, it might make sense for them to just sit on that unit. That means, essentially, it’s out of the supply chain and then Charles would be right. Lower prices on existing stock would discourage sellers. They’d “wait for another day” in hopes of getting a better price. Theoretically as more and more people do this, the supply remains constrained and, maybe, decreases enough that price might go up.
Two problems with this. First, many people in this situation are not holding out, they’re walking away or are in foreclosure. There is plenty of pressure to sell at a loss because of other opportunity costs. The owner might not like it, but eventually, if they don’t want to live in the unit they own, other things eclipse their loss in present dollars at the time of sale. Sometimes its a forced sale, other times it’s the desire to move on.
The second problem is that Charles is talking about existing housing. I’m talking about new housing. An overabundance of new housing isn’t going to result in ghost towns. In the case of new housing we’re not talking about folks that bought units at the height of the market and now are worried about a loss, we’re talking about adding new units to the supply. If the condo market is down (as it is) then the rental market might blow up. That is actually what is happening, especially in Seattle. Here’s a quote from a very recent story in the Seattle Times:
Apartment development is a cyclical business, and right now it’s on a big upswing in the Seattle area. More new apartments will come on the market in King and Snohomish counties in 2013 than in any year since 1991, one researcher projects.This apartment boom, however, is different from those that preceded it.
This time it’s focused almost entirely on Seattle. Developers, for the most part, are bypassing the suburbs.
The city accounts for 85 percent of all the apartments under construction — and 90 percent of all units in the pipeline — in King and Snohomish counties, says Tom Cain, president of research firm Apartment Insights Washington.
Most of those projects are in Seattle’s close-in, highest-density neighborhoods. It’s unprecedented, Cain says.
Why is this happening?
Observers attributed the turnaround to a host of influences: foreclosed homeowners re-entering the rental market; an economic recovery that was sufficiently strong to allow some young adults to finally move into their own places; and growing disillusionment with homeownership.
More people are moving to dense neighborhoods. That means supply is dropping which, in turn, means that prices are going up. Again from the article:
More than 3,000 apartment units are under construction in Seattle.
Developers began racing to get new apartments out of the ground here and elsewhere after the apartment industry suddenly rebounded a year ago.
Vacancy rates, which had been rising, started to fall. Rents, which had been slipping, began climbing again.
It’s a beaufiul thing. Vacancy rates go up, rents drop, people start moving in, vacancy rates drop, and prices go up. Developers see the opportunity to catch the cycle as it leads to scarcity which means higher prices.
Now if we do what some people on Council are suggesting, and cap that development capacity we’re going to retard the cycle’s progress. One thing the City can do is keep the zoning down. If it does that, all it’s doing is putting a big, heavy lid on the supply side of the cycle. It means we’ll never get to the place where we get to oversupply, lower prices, more people moving in, followed by higher prices. It’s just Folkenomics from a guy writing a land use blog. But I find the logic inescapable even if I don’t have 1000 excel spread sheets to back it up.
And as for the “shadow inventory” idea I guess it’s possible. But I’ve never seen developers agree on very much of anything except stuff in the abstract. The idea that with a wink and a nod developers are taking big numbers of units off the market to drive up the prices is, well, a conspiracy theory. And if it’s true God bless their little hearts. I hope they make a million bucks. Anyone that is able to coordiante such a scheme deserves to make a profit. I do remember pictures from the depression of dairy farmers pouring out milk on the ground in hopes they’d drive up prices (it’s happened recently too). I don’t think that worked all that well.
I guess all this might make me a “shill” for development interests in the city. It’s true that somebody making money on developing new housing doesn’t keep me awake at night. I honestly don’t worry about that. As to what my own interest is, I guess maybe some of my logic professors efforts paid off. I’m no economist. But It’s really hard for me to see, logically, how we spark economic development, increase housing supply, and make it harder to develop real estate at the same time. It seems even less logical to me to do that because we’re worried that someone is making too much money at it or that there might be “shadow inventory” lurking out there somewhere.
Planning where new growth happens is something the City can and should do and that’s why I don’t think that we should just abolish zoning all together. When we plan growth well we can create the kind of economic compression that keeps the economic engine cranking. Taking new growth and widely dispersing it all over town is bad planning and probably bad for the market. But considered up zones, especially near transit, can’t be a bad thing, even if the zoning there is way too much for what the market delivers.
One argument against these kinds of up zones is the impacts they might have on people living in neighborhoods like Roosevelt or Beacon Hill. I can’t say that I worry too much about that either. Change isn’t easy, and I think that when neighborhoods see change coming, plan for it, and work together to figure out how to adapt they do really well with it. But when the City plays the role of protector against change, it just facilitates bad behavior. Yes, the City Council should listen to worries about what 120 feet might do to damage the neighborhood. They should listen. Then they should do we know works with TOD: create a zoning plan that promotes density to support demand for light rail and other transit alternatives.
I guess I’m not a neighborhood advocate either. I’ve been voted off that island. Whatever. But I don’t think neighborhoods are well served when the City Council listens to whoever shows up at meetings complaining about the impacts of growth. The truth is that the opinions of people living in neighborhoods today, should be balanced against the people who are coming in the future. Too often the City process puts it’s fingers on that scale, tilting it towards those angry people sitting right in front of them rather than the residents of the future.