Among the more risible arguments advanced by the anti-growth crowd is that somehow by allowing more development in Seattle we will end up overbuilt, with too many housing units and not enough people to fill them. One Seattle City Councilmember even worried aloud that neighborhoods like Roosevelt would become transit oriented “ghost towns” with window shutters flapping in the wind, and tumbleweeds rolling down the street if the Council rezoned key blocks there.
In my ongoing reading about how the law of supply and demand plays out in the housing market I found a study that looks at the overbuilding issue,”The Supply Side of the Housing Boom and Bust of the 2000’s. Even if we were overbuilt or overbuilding, it wouldn’t be a bad thing, especially with Seattle’s already tight supply of housing.
But don’t just listen to me, here’s one of the findings from a literature review of a variety of studies including one by Edward Glaeser and Joseph Gyourko:”
This is illustrated in Figure 1 which contrasts two local housing markets – one with a completely inelastic short-run housing supply curve, S(I), [like Seattle] and one with an elastic short-run supply curve, S(E). The replacement cost of housing is given by C and initially both markets start out with prices equal to replacement cost at point A. A housing bubble develops which shifts out housing demand in both markets from D0 to D1. There is no supply response in the inelastic market so prices ration this irrational exuberance by increasing to P1(I) as indicated at point C. In contrast, in the elastic supply market both prices and new housing supply react to the outward shift in demand. As a consequence, prices adjust by less than in the inelastic market rising only to P1(E) as indicated at point B. When the bubble bursts, assume that demand reverts back to D0. Prices in the inelastic market decline back to their pre-bubble level of P0. However, due to the new housing supply added to the elastic market and the durable nature of housing, prices in the elastic market overshoot on the downward side to P2(E) < P0.4 As fundamental demand begins to expand in the elastic supply market, prices will adjust upward but there will initially be no new building activity. Once prices have recovered to the replacement cost, new supply will again be added to the market. Overbuilding to the extent that it occurs has important consequences for local housing markets (emphasis mine).
If cities like Seattle that have a limited supply of housing don’t allow building more housing when prices go up, then when prices finally do fall, they won’t fall as far as they would if the city had allowed more housing.
However, allowing more housing will cause the market to “overshoot on the downward side” of price, meaning cheaper housing. When high prices for housing finally reach their peak, they will fall further than they would if housing supply was restricted during a boom in demand for housing, leading to bargains for people in the housing market.
Right now demand for rental housing in the city is on the rise. You don’t need fancy charts or a squad of researchers to figure out that building more rental housing now, when demand is high, can result in an excess of units when developers pull back from building as they surely will when supply starts to outpace demand.
Sometimes people in Seattle can confound profits with greed, worrying that allowing more building will line some other people’s pockets. But building more when price is high is a logical thing to do. Sure, some developers will make more money in the short run, but in the end, more housing in a city with a limited supply of land for new housing will end up being cheaper for people moving to our city.
What would happen if the City Council started handing out building permits for new housing as readily as they produce letters encouraging neighborhoods to thwart development?
As long as we obsess about design and the greed of private businesses, we are failing the consumer, often young with a family and a limited income, who is trying to find an affordable place to live in our city. The one thing we can do if we want to lower housing price in Seattle is to do more than just subsidize the purchase of existing supply, but also reduce the burden on efforts to increase supply by loosening regulation. If we want to perpetuate sprawl and high housing costs the best thing we can do is what we’re doing now, keeping supply low with too much worry and regulation.