Jonah Swallows the Whale: The Housing Supply and Demand Debate Continues

Supply and Demand or Miracles: Which side are you on?
Clarence Darrow and William Jennings Bryan at the Scopes Trial, 1925. Wikipedia Commons

Darrow: But do you believe He made them–that He made such a fish and that it was big enough to swallow Jonah?

Bryan: Yes, sir. Let me add: One miracle is just as easy to believe as another.

Darrow: Just as hard?

Bryan: It is hard to believe for you, but easy for me. A miracle is a thing performed beyond what man can perform. When you get within the realm of miracles; and it is just as easy to believe the miracle of Jonah as any other miracle in the Bible.

Darrow: Perfectly easy to believe that Jonah swallowed the whale?

–From Clarence Darrow’s cross examination of William Jennings Bryan at the Scopes “Monkey” Trial, 1925

The debate about “affordable housing” often ends up sounding like the debate over evolution between Clarence Darrow and William Jennings Bryan who argued at the1925 Scopes Trial; a battle between fact and fiction, miracles and science. Those of us who look at the science about how housing lenders and investors spend their money find that what guides those decisions is supply and demand. Real people make real decisions about building housing using real money based on whether they think housing supply is increasing or falling.

Others, however, insist that supply and demand doesn’t apply to housing in Seattle. Somehow housing is different.

Here’s a commenter from a recent Seattle Times story on rising rents in Seattle, Rent increases here lead the nation, study finds.

The old tired song of “supply and demand” needs to be retired. This is artificially created supply and demand. A handful of developers are profiting and building apartments thereby raising the overall baseline of rental rates [that] other homeowners greedily follow under the guise of “market value.”

Sure, the argument goes, if we let builders make more housing, increasing overall supply and choice in the market, they’ll just make even more money because they just jack up the prices “artificially.” Then they’ll laugh all the way to the bank while the rest of us suffer.

But we know that this idea—that the supply of housing has nothing to do with price—is truly an example of magical thinking.

The Seattle Times story explains where rental prices come from.

The vacancy rate in King County last spring was 3.32 percent, the lowest since 1998, according to apartment-research firm Dupre + Scott.

Current demand for apartments in the Seattle area is “stunning,” Willett said.

There you have it. When the supply of vacant units is low and demand is high, prices go up.

Do prices ever go down?

Rents are very sensitive to economic booms — and busts. After the tech bubble burst, Seattle area rents fell as much as 5.7 percent. After the housing bubble burst, rents plunged as much as 10.1 percent during the Great Recession, MPF data show.

When the economy slows, people have less money to spend and stay in place. Demand falls, the supply of vacant units increases, and prices fall. Landlords have to compete for tenants rather than tenants competing with each other for scarce vacancies. The best and only tool for a landlord to compete in a market with lots of vacancies is to lower rents.

The other way prices fall is when the market heats up. That’s a time when builders want to capture the profits from higher rents. They build more apartments to meet the demand. Then…

The pace of [rent] increases should slow down as developers open more apartments, Willett said.

Now either all these forecasting firms are engaged in a wide-ranging conspiracy to fool us or they know what they are talking about. Certainly, builders of all kinds—for profit and non-profit—listen to what forecasters say when deciding what to build and what to charge for rents. Banks and investors use the same information to decide where and how to invest in housing.

Predicting what prices will do in the future is hard to do; it’s risky. And when people take risks and they end up being right, usually, they make a profit. If they guess wrong they lose. That’s how the market place works.

It’s hard enough to believe that a big fish could swallow Jonah, but to believe that Jonah could swallow the big fish? Now that would be a miracle; kind of like rents going up even when we increase housing supply to outpace demand.

Instead of spending out time arguing over something that is pretty much established fact, shouldn’t we turn our attention to how we reduce barriers to increasing the supply of housing for people who want to live in our city so they have more choices? That, I guess, might take a miracle too.