Where do upzonings happen?

I think the most useful way to think about NIMBYism is as a neighborhood-centered phenomenon. When people shop for homes, they shop for specific, physical features of a dwelling, of course, but mainly they shop for neighborhoods. The quality of neighborhood amenities — interpreted broadly to include things like school quality and access to the CBD — varies wildly from neighborhood to neighborhood, and thus does the amount people are willing to pay for those amenities.

What NIMBYs are really after is limiting access to neighborhood amenities, mostly by limiting the quantity of housing. Neighborhoods (at least the ones empowered politically) do their best to hold housing below the market-clearing quantity. This ensures that the value of neighborhood amenities is capitalized into home prices. Without quantity controls, the “nicest” neighborhoods would be the densest. Instead, thanks to zoning, they’re simply the most expensive. There’s a steep premium for buying into the neighborhood club.

Here’s evidence in favor of the “club” theory from L.A. planner C.J. Gabbe. (H/t Urbanize.LA.) Gabbe asks the question, “Where do upzonings and downzonings happen?” To answer it, he looked at how the zoning of each of L.A.’s 780,000 parcels changed between 2002 and 2014, and tallied whether a lot was “upzoned” or “downzoned”, as measured by the change in allowed residential density.

The first striking result was how few of the parcels were either upzoned or downzoned: an average of just 225 acres were upzoned and 216 acres downzoned annually between 2002 and 2014. That is, less than two-tenths of one percent of L.A.’s land area was upzoned or downzoned each year. Given the surge in demand for housing in L.A., especially over the last 6 years or so, that’s remarkably little.

But the other thing Gabbe documents is that resistance to zoning really does seem to depend on the quality of neighborhood amenities.

It is not known why some Los Angeles parcels were upzoned and not others. The City should be increasing housing densities near public transit and in other neighborhood where growth enables the City’s goals, including helping to mitigate climate change.

But it is clear that upzoning in Los Angeles follows the path of least political resistance and most development opportunity. Upzoning was most likely on well-located parcels near freeways, and on parcels previously zoned for low-intensity uses like manufacturing and parking. For every mile farther from a freeway ramp, the odds of a parcel being upzoned were nearly halved. The odds of upzoning were 85% higher for a parcel where housing wasn’t allowed in 2002 (e.g., parcels zoned for manufacturing, parking etc.)

Meanwhile, upzoning was least likely in neighborhoods with average or higher shares of homeowners coupled with desirable amenities such as proximity to the beach and high-performing schools. A parcel in a neighborhood with a high homeownership rate was about 96% less likely to be upzoned than a parcel in a neighborhood with a low homeownership rate. (High homeownership neighborhoods were defined as the City’s top quartile in terms of ownership and low ownership neighborhoods were those in the bottom quartile.) For every mile farther from the beach, the odds of a parcel being upzoned increased by 56%. Lastly, every 100 point increase in a parcel’s local elementary school Academic Performance Index score decreased the odds of being upzoned by 15%.

If the housing markets were at all efficient, a nice neighborhood would be upzoned as demand rises for its specific set of amenities. Nice neighborhoods should be growing denser than less-nice neighborhoods. In reality, the opposite is true. A desirable amenity such as good beach access or a good neighborhood school just makes neighborhood owners more determined to fight off any sort of increase in the quantity of housing. Clubs must be exclusive to be expensive.

Swimming pool NIMBYs

A timely illustration that demand for neighborhood amenities might be more inelastic than commonly assumed in the YIMBY community:

BETHESDA, Md.—Olympic swimming champion Katie Ledecky has broken records in pools around the globe. But in this affluent Washington, D.C., suburb, not even gold medals are enough to win quick entry into the Little Falls Swimming Club.

Using an arcane set of rules, the club each spring welcomes a few newcomers into its membership, which is capped at 377 families. Competition is so intense that residents have been known to choose homes based on proximity to the facility.

The annual selection process uses a numerical formula that gives would-be members points based on 10 concentric rings of increasing distance between an applicant’s residence and the exact center of the pool. The closer they are to the club, the better.

Other considerations include time notched on the waiting list and whether a family owns or rents. Most applicants spend six to eight years in pool purgatory.

In other words, the rules have been carefully tailored to capitalize the value of this neighborhood amenity into home values. It is literally a “club” amenity.

Ms. Ledecky’s family first applied about 15 years ago, before the swimming icon joined a team. Like all other hopefuls in the area, they had to wait.

The Ledecky family was still on the waiting list after Katie won her first gold medal at the London Olympics in 2012. In Rio, Ms. Ledecky won four gold medals and became only the second swimmer to sweep the 200, 400 and 800 free swim in a single Olympic Games.

“It’s kind of humorous that the fastest female swimmer couldn’t get into our pool,” said Bob Scribner, a local schoolteacher and the pool’s board member in charge of membership this year. “But I don’t think it’s funny enough that we should change the rules.”

Translation: “Demand is inelastic. We’re not increasing the quantity no matter how dumb it makes us look.” [See update. The County apparently has capped membership at 377 families.]

For decades, the modest, tree-lined pool has been a magnet to families looking for relief from Washington’s hot, humid summers, in a neighborhood where most don’t have pools of their own. More than 60 years old, it is slated for renovation starting next month.

“This isn’t some high falutin’ country club,” said board president Craig Piercy.

I guess “country” is the critical qualifier there. The pool is a (partially) non-rivalrous good, membership is restricted, and entrants are charged a fee. It’s even got “club” in the name. Ergo, the pool’s a club good, and as the rest of the article shows, a highly desirable one.

The crowded wait list is in part a function of local county zoning rules that cap the pool’s membership. Currently more than 260 applicants are in line to join the pool, according to its website. Those who join now pay $3,000 in equity that is returned when they leave the club, in addition to an annual fee that will be $700 starting in 2017.

Does the “in part” line mean the club’s board has authority to increase membership if it wants to? Given the discretion the board has to set the byzantine membership requirements, I’d be surprised if county zoning rules limit membership specifically to 377 families.

First, wannabes must contend with Article II of the Little Falls bylaws, which establish how many points applicants accrue as they vie for membership.

Those with the quickest route to membership live within 400 feet of the pool, the tightest of the 10 concentric rings that earns the applicant 10 points. Those at the farthest edge, who live between 3,601 and 4,000 feet of the club, earn a measly one point.

“People who live beyond the outer ring…will never get into the pool, so we do not accept applications from those people,” the club’s website notes.

Applicants accumulate one point every six months they have been on the wait list. Homeowners immediately get five points, while renters receive the same number of points only after they have been on the list for three years.

Crucially, an applicant’s standing on the list can change if they move closer to or farther away from the pool. Trademark lawyer Laura Geyer missed that wrinkle when she combed the bylaws ahead of her family’s 2003 move to a house located in a lower-scoring ring, she said.

“We would not have moved if I had known,” said Ms. Geyer. The move cost them dearly: they fell from 40th on the wait list to about 180th.

Her family was eventually successful. Now they won’t even consider leaving the neighborhood, since those who joined after 2004 must relinquish their pool membership if they do.

Local real-estate agent Dana Rice, also a Little Falls member, said many of her clients will only move within the rings established by the pool’s bylaws.

“If somebody’s moving from one part of the neighborhood to another, they’ll ask me, ‘Can you make sure this falls within the Little Falls boundaries?’ ” she said. “I will double check with the [pool board] membership just to make sure.”

Rather than move into a bigger house, Penny Dackis’s family built an addition to remain safely in the club’s proximity. “I just didn’t want to mess with the pool membership,” she said.

I cannot imagine that a mere 377 families cause congestion or crowding of the pool. The rational economic response to all this would be to sell more memberships until the membership fee equals the marginal crowding and congestion costs caused by each new member.

But perhaps there is a hard cap on membership. [Update: apparently there is.] The club members have meticulously and explicitly capitalized the price of a club membership into their home values. Given the desperate striving for membership, demand for the pool might be highly inelastic. If the club members/property owners did have the opportunity to expand the number of membership slots,  would they?

There are a lot of neighborhood amenities just like this — schools most of all — that engender the same sort of striving and jockeying for the “right” home. We’re so used to these amenities being being bundled with ownership in a specific neighborhood, though, that a newspaper article focusing on that fact  wouldn’t be very interesting. What made this story interesting enough for the WSJ (other than the Ledecky angle) is that club membership obviously is not precisely tied to a geographical area, so the club members have had to come up with a bunch of comically arcane rules to ensure that home values capture the value of club membership. With most neighborhood amenities, the zoning map does the hard work.

UPDATE: Apparently there is a hard cap on membership. The pool is a conditional use subject to all sorts of tailored regulations by Montgomery County, as comically detailed as the club’s residence rules. Here is an 11-page opinion of the County Board of Appeals laying down detailed regulations of parking, screening, noise and so forth. Here are the club bylaws.

Obviously, there is no important public welfare issue here. Someone who wants to swim can probably find a place to swim. Ledecky, who couldn’t get into Little Falls, wasn’t deprived of the opportunity to swim; instead, she joined Palisades Swim & Tennis Club, and the rest is history. I doubt that the residents of Montgomery County’s tony suburbs have trouble finding swimming clubs to join.

So the takeaway here (for me) is that demand can be quite inelastic for a neighborhood amenity even if there are substitutes; once the value of the amenity is capitalized into home prices, homeowners will go to seemingly silly lengths to make sure it stays that way.



Housing supply and land values

I missed this piece by Alon Levy, in which Alon takes issue with the notion that NIMBYism is really just a collective action problem. The theory is that no single neighborhood can, on its own, lower prices. But if residents of high-priced neighborhoods would cooperate on a broad, city-wide upzoning, home prices would fall. Everyone would be better off: the city would be a less expensive, more interesting, more vibrant place. Property owners would be better off, too. Land values would rise even as housing prices fell, because owners could build more stuff on their land.

Alon argues that if the problem was with metropolitan-wide regulations, then individual neighborhoods would have an incentive to seek upzonings. Neighborhood-level upzonings would not affect overall prices much and therefore would increase neighborhood land values, and so neighborhoods would have an incentive to “cheat”. In reality, land use regulations tend to be more permissive when promulgated at the metropolitan or provincial level. He argues that individual neighborhoods are actually choosing regulations that enable them to extract high rents from renters (particularly job seekers), and so have no incentive to upzone their own neighborhoods under any condition.

I basically agree with Alon but I think the point can be made simply by talking about elasticity of demand.

People loosely talk about city-wide or metropolitan-wide housing markets as if they were a unified market, but in reality a city’s housing market consists of a bunch of individual neighborhood housing markets, each with its own demand schedule. The reason is that amenities — the attractiveness of the housing stock, parks, school quality, proximity to job centers or retails centers, average resident income, etc. — vary wildly from neighborhood to neighborhood. We take it for granted that neighborhoods are effectively independent housing markets when we shop for housing, and are not surprised when home prices rise or fall a hundred thousand dollars just by crossing a street or railroad track.

Neighborhood housing markets are of course linked. The demand schedule for housing in one neighborhood depends not only on the amenities it offers, but also the availability of substitutes and metropolitan demand factors such as job growth. Some neighborhoods have good substitutes; some don’t.

If we recognize that a neighborhood housing market has its own demand curve, it makes sense to talk about the elasticity of that demand curve. The elasticity of that curve dictates whether homeowners have an economic incentive to support an upzoning.

If we assume homeowners want to maximize their land value, they will maximize (as Alon notes):

(P – C) * ρ

where P is the price of housing, C is the cost of construction, and ρ is density of units per area. This is the value of land or, equivalently, homeowner profit.

If neighborhood residents collectively act like a monopolist (i.e., they are a cartel), they will have an incentive to choose quantity so that marginal revenue is equal to marginal cost. That is,

P*(1 + 1/η) = C

where η is elasticity of demand. Demand is “elastic” — that is, large changes in quantity cause small changes in price — if ⌈η⌋ > 1. Demand is “inelastic” — that is, small changes in quantity cause large changes in price — if 0 < ⌈η⌋ < 1. (η is always negative).

The “elasticity of demand” need not be constant for a particular demand curve. Demand ordinarily becomes more elastic as you slide up the curve (higher price/lower quantity) and more inelastic if you slide down the curve (lower price/higher quantity).

If demand is inelastic, then marginal revenue is negative. That is, any increase in production will decrease total revenue. In fact, if demand is inelastic, a monopolist can increase total revenue (and profit) simply by reducing production. This is why monopolists are always assumed to be working on the elastic part of the demand schedule.

This is all very basic Econ 101 stuff. But the implication is simple: if a neighborhood is setting quantities of housing in order to maximize land value, it will oppose an increase in quantity (an upzoning) if it’s operating at the inelastic part of the demand schedule.

You can’t simply assume that a neighborhood, like any other monopolist, is facing elastic demand. A neighborhood cannot reduce quantity to raise prices. After all, neighborhoods can’t order homeowners to tear down their houses. So if a neighborhood finds itself confronting inelastic demand, it’s stuck there. All it can do is sullenly refuse to increase quantity, and complain that it’s already got too many people.

People do assume, though, that demand for neighborhood housing in expensive cities is elastic, probably because the neighborhoods are so terribly expensive and the neighborhoods seem to have good substitutes (namely, every other terribly expensive neighborhood). But if you assume that neighborhood residents are acting in their economic self interest, then perhaps you should start by assuming inelastic demand and insist on evidence it’s not true.

A corollary of inelastic demand is that you really can make an expensive neighborhood cheaper just by building housing in that neighborhood. (And the way to make a city more affordable is by making a bunch of neighborhoods more affordable.)

Let me raise one other nuance. Even if we assume that the demand for housing in a neighborhood is elastic at a particular price point and that MR > MC, that does not mean that MR > MC for any quantity of housing. It might be that increasing the quantity of housing by 10% would increase land value, but that increasing it by 100% would decrease land value.

This is where the cartel structure comes into play. If the neighborhood land was owned by a single owner, then the owner would just increase housing by 10%. But a neighborhood consists of, say, 1,000 different owners each on his own lot. A neighborhood can’t permit each owner to build one-tenth of a housing unit. In other word, a neighborhood can’t increase supply by a small amount and do so uniformly. Housing comes in discrete, indivisible bundles. A 10% increase means that a small percentage of owners will get to add a housing unit and make a lot of money, but others will just see a drop in the price of housing. There’s no way, consistent with the cartel structure, to implement a small increase in quantity.

So neighborhoods tend to oppose small upzonings.

The only sort of upzoning that would muster neighborhood support in light of internal cartel politics would be a large upzoning, but large upzonings are likely to reduce the value of neighborhood land.

So neighborhoods tend to oppose large upzonings.

(People systematically underestimate how much land SF-zoned neighborhoods contain. One might assume that the homeowners would make a fortune if their neighborhoods were upzoned to Barcelona densities, but the fact is that even a relatively modest and uniform increase in entitlements will double or triple the population of a single-family neighborhood. There’s a limit to the number of people who will pay a premium to live in a neighborhood, no matter how nice.)

Let me emphasize that this is not a welfare analysis. For starters, I haven’t considered the welfare of the very large number of people who are shut out of these neighborhoods. Econ 101, again, tells us that monopoly pricing reduces total welfare. My point is that homeowners might have powerful economic incentives to oppose upzonings no matter how modest and no matter the eloquence and passion of the appeal.


Can housing quotas affect demand for housing?

Economist Nick Rowe at Worthwhile Canadian Initiative  has a provocative piece asking whether housing demand curves might actually slope up. He puts his argument in abstract mathematical terms (again, he’s an economist), but the germ of the idea is that “everybody wants to live near everyone else, wherever that happens to be.” Our decisions about where to live are dependent on what everyone else decides to do. If you move from the countryside to the city, I get more out of moving to the city, too. And vice versa. Our decisions mutually reinforce each other.

Rowe assumes that these decisions not only reinforce each other but are “strong strategic complements,” which means roughly that they generate positive feedback. We can think of it in probabilistic terms: if my probability of moving from the countryside to the city is conditioned on your probability of moving, then our decisions are “strong strategic complements” if a 10% increase in your chance of moving increases my chance of moving by more than 10% (and vice versa). That’s not a completely arbitrary assumption: if you and I live in the countryside, your decision to move not only makes the city a more desirable place (because it now has more people) but it makes the countryside less desirable (it is now a bit lonelier). That is, when you raise your probability of moving, you not only increase my chances of being stranded, you make the consequences of my being stranded more dire. I adjust my probability by ratcheting it up even more.

This positive feedback will cause people to continue pouring in from the countryside into the city, at least over some range of population. (Overcrowding, congestion and so forth will dampen the feedback at some point.)  Within this population range, increasing the amount of housing further increases the demand for housing. But if the city adopts a housing quota through planning restrictions, the population will stabilize and prices will adjust so the housing market can clear. As long as strong strategic complementarity prevails, relaxing the quota (i.e., building a little more housing) will, counter-intuitively, cause prices to rise. Rowe explains: 

It’s a bit like Say’s Law (“supply creates its own demand”), only even more extreme. If you build delta S more housing, so delta S more people move to the city, even more than delta S more people will want to move to the city at the previous price of housing, so the equilibrium price of housing must rise. If you build 100, 150 will come.

It’s a provocative argument. It turns the Econ 101 arguments upside down. Not surprisingly, it generated a fair amount of annoyed twitter chatter from market urbanists (including me) and sage head-nodding from those who believe new construction begets high home prices.

Rowe’s model is dependent, of course, on this very strong assumption that location decisions are subject to positive feedback. This assumption might hold for places like Lagos or Dhaka, which have experienced accelerating growth over the last couple of decades despite any the lack of large-scale industrialization. If you live in Nigeria or Bangladesh, these cities might be increasingly attractive despite (hypothetically) deteriorating living conditions just because everyone else you know is moving to them. Their growth more or less forces you to move there too. (Or maybe not. Nigeria and Bangladesh are both growing rapidly. Those new residents have to live somewhere.)

But I don’t think the assumption of strong strategic complementarity applies in the United States. There are 35,000 cities, towns and hamlets in the United States of every size. Many small towns are growing and large cities are shrinking (or are growing very slowly), so his assumption clearly does not hold as a general rule. We have cheap, fast-growing cities (Houston, Dallas, Phoenix) and expensive, slow-growing cities (San Francisco, New York). Neither group fits Rowe’s model, which predicts that growth will accelerate even as housing prices rise, and that tamping down growth will hold prices in check.

Ultimately, I don’t think the model holds in the United States because people don’t care that much about total population. Perhaps the best way to put it is this: if your moving to City A really would increase my utility of moving to A, then I’d already be living in larger City B. We mostly care about other criteria when we shop for cities.

But Rowe’s assumptions might be modified to produce a useful model for American cities. Let’s think in terms of neighborhoods rather than cities. If we assume that people care more about some quality of a neighborhood than the gross population of a neighborhood, housing quotas could create positive feedback. For example, if people care about the average income of a neighborhood, then a rise in a neighborhood’s average income will raise the price of housing (because the neighborhood will be more desirable). As prices rise, the neighborhood becomes unaffordable to lower income buyers (because high-income buyers are generally willing to pay more), which in turn ratchets up the average income, and so on. On the other end, as high-income buyers stream into the neighborhood, the average income of the neighborhoods they leave drops, lowering the demand for these neighborhoods. These conditions might cause the high-income to cluster together in a high-priced, high-income neighborhood, and the less well off to cluster together in cheaper, low-income neighborhoods.

Whether there is actually positive feedback of the sort Rowe describes probably depends on the housing supply curve. If housing can be added cheaply and quickly to a neighborhood, the feedback effects might be very weak. A temporary rise in a neighborhood’s average income will make the neighborhood more attractive for everyone — it will entice rich and poor alike to the neighborhood — thereby limiting the long-term rise in neighborhood income.  We can reasonably assume that this will affect what people are willing to spend. After all, what’s the point of spending a lot of money to live in a high average income neighborhood if the high average won’t stick? In this case, loose housing supply dampens the feedback rather than intensifies it.

Housing quotas ensure that a neighborhood’s high-income income “sticks.”  They increase the returns to the high-income from clustering together.

That’s just a thought. I haven’t tried to work it out rigorously. But a few thoughts on what we’d expect to see under this model:

  • Merely imposing a quota on one neighborhood could destabilize a city-wide equilibrium and cause the rich to congregate together — even without any change in the city’s total population or the individual income or preferences of its residents.
  • Residents of high-income neighborhoods have an incentive to resist any sort of housing that would lower the neighborhood’s high average income. High-income residents might be peculiarly averse to unobtrusive housing (say, dwelling units tucked into a backyard) if the housing is likely to attract low-income residents.
  • Residents of high-income neighborhoods will be indifferent to loosening the planning restrictions in low-income neighborhoods. Increasing the supply of housing in a low-income neighborhood will not drop the average income of the high-income neighborhood.
  • Historic zoning can be thought of as the ultimate down-zoning: the housing capacity of a neighborhood is limited to whatever happens to be on the ground when the historic zoning is approved. Residents of a moderately prosperous neighborhood have an incentive to agitate for historic zoning (or other down-zoning) in hope of triggering positive feedback effects.
  • Rent-controlled renters in high-income neighborhoods have an incentive to oppose new housing that attracts below-average income residents because rent-controlled renters benefit from a neighborhood’s high average income just like everyone else. In fact, they may have a stronger incentive than the typical homeowner since they don’t have to worry about feedback effects pricing them out of the neighborhood.

Of course, my assumption that people shop for neighborhoods based on average income is overly simplistic and might not hold even in a simplistic sense. But I think people do tend to care about a neighborhood’s average income, even if they usually state it in other terms (e.g., average student test scores), and people don’t care much about total neighborhood population.

Non-gentrification is never a story

A gentrification story from the Statesman:

For the past 3 1/2 years, Kerry Arrant has lived in the Cactus Rose Mobile Home Park in East Austin. His dwelling is a 1954 Spartan — a “stripped-out” mobile home he describes as “post-apocalypse-looking.”

In the mobile home park — off U.S. 183 near Vargas Street in the Montopolis area — Arrant is surrounded by residents who have lived there much longer. They are mostly Hispanic and non-English speaking — and they might not be living there much longer.

The Cactus Rose Mobile Home Park case is the latest battleground in Austin’s ongoing wave of development — a tide that has sometimes led to residents being forced to move from older residences to make way for new projects.

The owner of the 23 acres where the mobile home park now sits has filed for a zoning change with the city of Austin that, if approved, would allow developer Oden Hughes to build Lenox Oaks, a project with 356 apartments and 20,500 square feet of commercial space. Oden Hughes has a contract to buy the land from 500 Bastrop Highway Ltd., whose owners include Jimmy Nassour, an Austin lawyer and real estate investor.

The new development would displace more than 50 households — many families with children — who pay on average between $400 and $700 a month, not including utilities, to rent a space in the mobile home park, said Susana Almanza, a community activist who, as president of the Montopolis Neighborhood Association, has been working to help the residents.

Gentrification stories like these, unfortunately, are common. They are usually pitched as battles between developers and residents (which is understandable), but the broader land-use context is rarely reported.

For example, left unsaid in this article is that very little land in the vicinity of this trailer park is zoned for multi-family. (The tract in question is zoned commercial, so the existing trailer park is a non-conforming use.) There is a vast amount of undeveloped land in the area, but it is all reserved for commercial, industrial or civic uses.  And that’s evidently how the neighborhood likes it, because the future land use map continues to reserve all that land for non-residential use. (The arrow points to mobile home site.)

Montopolies flum

Trailer parks are a particularly disfavored use in Austin. They are permitted in only one of Austin’s 38 or so base zoning districts — the  “MH” district. And because virtually every use other than mobile homes is prohibited in the MH district, a property owner who wants to build a new mobile home park must accept a drastic down-zoning for the privilege.

Needless to say, the neighborhood FLUM sets aside no land at all for mobile homes.

As I noted last time, there is evidence that high-demand places see less displacement of low-income residents if they have a lot of development than if they have a little bit of development. This is counter-intuitive, but there are a couple of explanations. One is that a lot of new housing means there is less pressure on the cheaper existing housing to filter up to a higher rent class. A second explanation is that places with a lot of development tend to be generously zoned, which makes under-used commercial properties the attractive, low-hanging fruit.

Take South Lamar Boulevard in south Austin. Approximately 2,700 multi-family units are under construction or have been completed recently along this two-mile corridor, and that’s just counting the large vertical mixed use projects. Exactly one of these projects — Post South Lamar — involved the displacement of existing residents, and that project was initiated before a massive upzoning in 2008 allowed VMU development on commercial properties. Since that upzoning, developers have contented themselves with converting under-used commercial properties to multi-family, shying away from existing multi-family complexes.

For the sake of reference, there were only 23,000 housing units in the 78704 zip code in 2010. The upzonings along South Lamar have allowed this one street to accommodate a 12% increase in 78704’s entire housing stock, with minimal displacement of existing, cheaper housing.

That’s a great story. But no reporter wakes up in the morning and says, “I think I’m gonna write a story about why this apartment complex is still standing.” So the absence of gentrification tends to go unreported.

Market Rate Housing and Displacement

California’s nonpartisan Legislative Analyst’s Office has published a report pleading for more market-rate housing in California, especially in its coastal urban communities. Daniel Hertz has a good summary. The gist is that California cannot subsidize its way to affordability through either rental assistance programs or inclusionary zoning. 2.5 million low-income households in California spend more than 30 percent of their income on rent, which is a common “affordability” benchmark. Providing housing vouchers to these households would cost $20 billion annually — and that ignores the sharp increase in rents that a massive increase in subsidies would cause.

The LAO argues that any additional subsidies must be accompanied by an increase in the supply of market-rate housing. Many believe that market-rate construction makes neighborhoods less affordable rather than more affordable. The LAO explains why this is wrong. (Answer: Econ 101 supply and demand and housing filtering.)

But the LAO’s clincher is its empirical analysis of low-income “displacement” patterns in the Bay Area between 2000 and 2013. The LAO deemed a census tract (i.e., neighborhood) to have experienced displacement if (i) its overall population increased and its population of low-income households decreased or (ii) its overall population decreased and its low-income population declined faster than the overall population. Using a sophisticated regression technique on data on Bay area census tracts, the LAO concluded that more market-rate construction was associated with less displacement. High-construction census tracts had a 26% chance of experiencing displacement, compared to a 46% chance for low-construction census tracts.

LAO Brief - displacement

The LAO’s report doesn’t explain precisely how lots of market rate construction prevents displacement. We can speculate. “High construction” census tracts likely have a lot of underdeveloped land zoned for multi-family or mixed-use development. Developers want to redevelop this land first. Older, fully amortized apartment buildings, even low-income ones, throw off a lot of cash. Demolishing them has a high opportunity cost.  They accordingly are more expensive to redevelop than, say, an aging, low-intensity retail or commercial property. Austin’s South Lamar is a good illustration. 2,700 or so apartments along the corridor have either been completed recently or are under construction. Exactly one of these developments involved the demolition of existing apartment units. And that one development was planned and permitted before much of the street was upzoned for vertical mixed-use development. The other projects have “displaced” low-intensity commercial uses. 2008’s VMU upzoning perhaps saved hundreds of cheaper apartment units.

That’s not the only possible explanation. We tend to think of a city’s housing market as one big market. For example, the press reports average home prices and price increases on a citywide basis. It might be more accurate to think of a city’s housing market as a bunch of neighborhood housing markets. They are linked together, of course, but if they function somewhat independently, then neighborhood rents will be quite sensitive to local increases in supply. The above chart certainly suggests this is the case.

If housing markets vary from neighborhood to neighborhood, then homeowners in a given neighborhood will be disproportionately concerned with development in their neighborhood. And homeowners in expensive, exclusive neighborhoods will be disproportionately concerned with minimizing new supply in the neighborhood, thereby keeping neighborhood membership low.

Econ 101 and the Missing Middle

HUD has released 2015 building permit tallies. Austin’s tallies for 2015:

  • Single Family Units: 2,846
  • Duplex units: 326
  • Units in 3-4 unit buildings: 30
  • Units in 5+ unit buildings: 6,890

This bipolar split is typical of American cities. Some cities build more single-family than multi-family. Some build more multi-family than single-family. But the fourplex is dead. We build very little small-scale multi-family these days, which is why the “missing middle” is a focus of zoning code rewrites and a meme among the New Urbanist crowd.

Although “missing middle” housing could easily be added to established single-family neighborhoods while preserving “neighborhood character,” it is mostly illegal in Austin and most other American cities, at least within the single-family districts, and it is often staunchly resisted by homeowners in older neighborhoods, where the form of housing makes most sense. Some homeowners, in fact, seem to dislike “missing middle” housing more than any other kind of housing. It is worth thinking about why.

It is useful to first think about building technologies After manufactured housing, the simplest, cheapest housing technology is the low-rise, wood-frame construction used in  detached single-family homes. Small apartment buildings can be built using essentially the same techniques. Most large suburban apartment projects, in fact, are developed as a cluster of two-three story buildings containing 8-12 units each. These buildings would actually form nice low-rise, urban neighborhoods if they were arranged around a public street grid, but instead they are arranged around parking lots, private drives and landscaped common areas in garden-style developments.

The next step up from low-rise, wood-frame technology is the mid-rise apartment building of four to seven stories. This type of development requires elevators (and thus a concrete elevator core) and usually consists of “stick and brick” construction over a concrete podium. It is at least twice as expensive per square foot as similar quality single-family housing — more if it includes structured parking.

The next step up from the mid-rise technology, of course, is the high-rise which requires concrete or steel framing to the top, structured or subterranean parking, and compliance with stringent fire and building codes. High-rise construction is at least twice as expensive as mid-rise construction.

Housing supply is “lumpy” because of these abrupt changes in construction costs as the market moves from one type of housing to the next. Because it is much more expensive, on a per square foot basis, to build mid-rise housing than single-family housing, and much more expensive to build high-rise housing than mid-rise housing, the supply curve for housing within a neighborhood looks something like the stair-stepped red line:

Gentrification Supply-Demand chart

To grossly oversimplify things, once a neighborhood is built out with one type of housing, it becomes impossible to build new housing without switching to an abruptly more expensive technology. The supply curve remains vertical until the break-even price point at which the new technology becomes feasible. Once the break point is reached, it is possible to add many new units at roughly the same per-unit cost.

The graph above illustrates this: between prices P1 and P2, housing supply is perfectly inelastic. An increase in demand from D1 to D2 translates into a sharp increase in prices without any increase in supply. The new price P2 is still too low to spur new supply. But at P3, there is a sharp kink in the supply curve where the next technology becomes feasible. An increase in demand from D2 to D3 triggers a sudden burst of new construction. And the neighborhood (or at least the choice lots zoned for it) rapidly fills up with the next housing type.

(Note that not even vulgar Econ 101 predicts that housing prices will drop after a switch to a more expensive technology. The switch merely prevents prices from continuing to rise because new supply can continue to be added at the same cost.)

As noted, this model is a gross oversimplification. Supply curves are never perfectly horizontal because land costs increase as lots fill up with new development, even if per square foot construction costs remain flat. There is also a substantial lag between a spike in demand and the actual delivery of new supply, since the new supply takes a long time, perhaps years, to plan, permit and build. The surge in new supply thus tends to coincide with a peak in housing prices. Neighborhood residents (particularly those being priced out) infer that rising density is the cause of the high prices. They forget that prices were spiking when the market was static

Although supply curves are never perfectly horizontal, they are, unfortunately, often almost perfectly vertical due to zoning. If zoning limits housing within a neighborhood to detached single-family on a minimum lot size, then housing supply within that neighborhood becomes perfectly inelastic once the lots are built out. Any increase in supply must come from the conversion of low-intensity commercial tracts or older multi-family tracts to mid-rise apartment buildings, which will happen only after a sharp spike in single-family home prices. These commercial and multi-family tracts tend to be on the neighborhood’s periphery, which explains the pattern of low-intensity single-family housing ringed by abruptly larger multi-family development that prevails in Austin and many other sunbelt cities. This is just the stair-stepped supply curve stamped into the built environment.

Neighborhood supply curves are not vertical due to technological constraints. Switching from detached single family to duplexes does not require a change in technology: the same low-rise, wood-frame construction will do just fine. Likewise, going from the duplex to the four-plex does not require a change in technology, even if the four-plex is slightly more expensive per square foot to build. It is in fact possible to use low-rise, wood-frame construction to build accessory dwelling units, duplexes, three-plexes and four-plexes, row homes, courtyard homes, manor homes, dingbats and other low-scale housing types. Most of these cost more to build per square foot than detached single-family homes, but they are cheaper than mid-rise construction with concrete elevator cores. If we legalized the missing middle, the supply curve would not have the odd stair-step shape, but would be more smoothly curved. Neighborhoods would display a continuum of housing types rather than sharp transitions from single-family to mid-rise construction. Five-story apartment buildings would seem like a natural progression of existing density (as they do in Austin’s West Campus) rather than an abrupt shift. More housing could be built at lower cost, and fewer people would suffer sudden price shocks.

Liberalizing the code to allow more low-rise housing seems like it should be an easy sell politically. After all, opponents of zoning liberalization usually claim that they are trying to preserve “neighborhood character,” and it is possible to sprinkle single-family neighborhood with low-rise, wood-frame buildings that look like single-family homes even if they harbor multiple units. What could be more respectful of neighborhood character?

But some of the most ferocious neighborhood resistance comes to exactly these sorts of small-bore proposals. Austin just went through a knock-down fight over liberalization of the accessory dwelling unit rules.  I’ve been following Austin land-use politics for 15 years, and was still surprised by the ferocity of the opposition to small backyard cottages.

This is where the “club goods” view is useful. Homeowners in pricey, established neighborhoods have an incentive to oppose zoning liberalizations that threaten to enlarge the potential size of neighborhood membership and increase others’ access to neighborhood amenities.  They’re motivated less by concerns with traffic, noise, or “neighborhood character” than with minimizing the neighborhood’s carrying capacity. Patiently lecturing them about the virtues of “missing middle” housing will get you nowhere. Garage apartments, duplexes, four-plexes and other missing-middle types are not innocuous additions to the neighborhood housing stock, from their perspective; they are a realistic threat to grow neighborhood membership quickly and inexpensively. That’s a bad thing, not a good thing, if you’re seeking to to minimize club membership.

In fact, some homeowners in older, pricier neighborhoods, if forced to allow more housing, prefer to upzone peripheral  tracts for mid-rise developments rather than to loosen the restrictions against the missing middle in the neighborhood core. The mid-rise’s high construction cost provides some protection against new housing supply. (And many lots on the periphery will have poor access to the neighborhood amenities anyway — again, a feature, not a bug.) In Econ 101 terms, homeowners in these neighborhoods want a stair-stepped supply curve. Not surprisingly, that’s what our zoning codes tend to allow.



NIMBYism: the Incentives Approach

Very few homeowners have written a letter to the planning commission to object to a real estate development. Very few have signed a petition calling for the down-zoning or historic designation of their neighborhood. Even fewer have taken the time to show up at a zoning hearing to oppose a particular development project. Vocal opposition by a homeowner to a particular development — much less the organized, institutionalized opposition that prevails in some places — is the exception, not the rule.  I’ll wager this is the case even in those cities dominated by especially truculent homeowners.

Any explanation why some homeowners seem to oppose every new development project thus has to account for the fact that most homeowners don’t.

I think the right way to approach this is to look at homeowner incentives. The incentives approach requires us to assume that people are rational, that they understand and act to further their own interests. Assuming that homeowners act rationally, however, does not mean that homeowners always say rational things. And it certainly does not mean that homeowners are being honest about why they are objecting. Someone might object to development because it threatens a firefly habitat (i.e., a “field”), but odds are it’s not her concern for wee fireflies that is impelling her to spend a couple of hours at a zoning hearing.

I’ve been interested in land-use issues since I took a course on it in law school 25 years ago. I’ve closely followed zoning disputes in Austin for the last 15 or so years, and have followed zoning disputes somewhat less closely in a handful of other cities for almost as long. I continually see homeowners advance objections that are less ludicrous than a concern for firefly habitats but that nevertheless lack any basis in fact. That 12-unit apartment building down the street will not really generate enough traffic to congest your street. (It probably won’t generate enough extra traffic for you to detect without a traffic counter.) The shadows from that 40-foot tall building will not destroy your herb garden. That new apartment complex will not trigger a crime wave in your neighborhood.

The fundamental problem is that homeowners tend to settle on their opposition first and back-fill the reasons for it later. This doesn’t mean they’re lying or deliberately advancing flimsy arguments. They’re just dead set against the development, and people who are dead set against something can be extraordinarily creative in coming up with reasons to justify their opposition to themselves and to others. This is one reason people who routinely oppose new development don’t have a sense of humor about it, not even a little bit. (Just look at the comments on this lighthearted post. Who gets mad over lolcats?)

This is not to suggest that all objections to development are fabricated. Homeowners are sometimes quite frank about their real reasons for opposing development. But sorting frank objections from fabrications is just too hard. The incentives approach helps us cut through the chatter, freeing us to think about why homeowners act the way they do.

Why think about NIMBYism?

Anyone who follows zoning has witnessed this drama:

A developer requests a zoning change to allow a modest apartment building next to a mostly single-family neighborhood. The request prompts howls of protest from the neighborhood’s homeowners. At the zoning hearing, one homeowner after another trudges to the microphone to urge, earnestly and sincerely, that the development threatens his neighborhood’s character, the quiet and peaceful enjoyment of his home, and the lives of his children and small pets. If the neighbors think the hearing will go against them, they also will decry the lack of public process (regardless of how much process has taken place), and level accusations of gentrification or nefarious devotion to profit. Nothing has the potential to turn the bourgeoisie into revolutionaries quite like a zoning fight.

NIMBYism would be comical if it weren’t so damned effective.

But, unfortunately, NIMBYism is effective indeed. It has become increasingly difficult to build new housing in our most productive cities and our nicest neighborhoods. Over the past three or four decades, homeowners objecting to development have systematically curtailed the supply of housing where we need it most. The consensus among economists, on both the right and the left, is that zoning has driven up home prices, exacerbated economic segregation, and created a drag on the national economy by redirecting migration away from rich, high-productivity regions to poorer, low-productivity regions.

Although there is gads of research on the effect of strict development regulations, there has been surprisingly little analysis of its root cause. Strict development regulations do not materialize out of thin air, after all: they are the result of sustained, consistent political pressure by homeowners who object to development near their homes.

This background political pressure is taken as a fixture of the political environment of modern American cities. We have coined a term — “NIMBY” (for “Not In My Back Yard”) — to describe it.

The term, alas, has become trite. We can agree that “NIMBYism” is a bad thing (despite occasional attempts by homeowners to claim otherwise). It signifies, vaguely, opposition to development made for selfish reasons. Beyond that, the term lacks clear content. After all, it can’t be the case that any objection to any sort of proposed development constitutes “NIMBYism.” Was Jane Jacobs a NIMBY for battling Robert Moses’ plan to plow a superhighway through Greenwich Village? Is a homeowner a NIMBY for objecting to a paper plant, smoky barbecue pit, or some other plainly objectionable use next to her home? Nothing prevents us from labeling either a “NIMBY”, but, as the term is commonly used, neither arguably qualifies. Both Jacobs and the hypothetical homeowner could make a straightforward case that the proposed uses, whatever their public benefit, would inflict significant costs upon them personally. Objecting to development merely because it imposes disproportionate environmental costs on the objector is not the kind of selfishness we mean by “NIMBY”.

I contend that it is a useful exercise to think methodically about NIMBYism. Developing a sound theory of NIMBYism will, of course, enable us to define NIMBYism. The working definition used by most today is little more sophisticated than, “I know it when I see it”.

But if a “theory of NIMBYism” is to be useful, it must explain NIMBYism as well as define it. We lack a theory that explains why homeowners object when they do. To be clear, the central puzzle is not why homeowners object to development, but why only some homeowners object. Homeowners in some places seem to object to every garden-variety proposal while homeowners in other places exhibit only indifference. On average, California homeowners tend to object to development more often and more vigorously than Texas homeowners (and have more tools to do so). But there is plenty of variation within each state — Austin homeowners are more reliably “NIMBY” than Houston homeowners — and, perhaps most significantly, plenty of variation even within cities. Within Austin, Hyde Park homeowners are more likely to object to development than homeowners in Dove Springs. A useful theory of NIMBYism explains why some homeowners have an incentive to object to development while others do not.

There are other puzzles that any sound theory of homeowner obstructionism ought to solve. For example, why do homeowner objections to development seem to end at their neighborhood’s boundary? If NIMBYism is an attempt to cartelize the supply of new housing, homeowners ought to systematically object to development anywhere, or at least nearby, rather than just within their neighborhood. But homeowners tend to show little interest in development proposals one or two neighborhoods over.

Why are homeowners more likely to engage in NIMBYism than renters? And why do the exceptions to this rule tend to occur in rent-controlled cities?

Why is obstructionism concentrated among homeowners rather than other types of property owners? Apartment owners, for example, have a general interest in limiting the supply of competing product, but one rarely sees an apartment owner speak at a zoning hearing against new development.

Why has NIMBYism intensified over time? Zoning was widely adopted nearly a century ago. Homeowners, presumably, have always cared about their home values. If NIMBYism is simply about “protecting home value,” why is NIMBYism more prevalent today than in the 1930s, 1950s, or even 1970s? And why has it grown so much more sophisticated?

A good theory of NIMBYism will not only explain the phenomenon of homeowner obstructionism, but offer a basis for realistic policy proposals. Systematic, institutionalized NIMBYism, such as that pervading California and the northeastern megalopolis, imposes serious inefficiencies on the economy and exacerbates social inequality and segregation. As others have pointed out, though, the cure prescribed by “market urbanists” — “Loosen zoning restrictions!” — is little more than a pipe dream. A better understanding of NIMBYism might help us craft remedies that stand a chance of being implemented.

Thus, this blog, which is my attempt to lay out a theory of NIMBYism.

My central thesis is that NIMBYism is about monopolizing access to neighborhood amenities. In the absence of zoning restrictions on the number of housing units in a neighborhood, neighborhood amenities would be a public good. Zoning converts neighborhood amenities from a public good (a partially non-rivalrous, non-excludable good) into a “club” good (a partially non-rivalrous, excludable good). Because “club” membership is bundled with home ownership, zoning causes the value of neighborhood amenities to be capitalized into home prices. NIMBYism can be thought of as the practice of objecting to development in order to protect the value of “club” membership.

Homeowners will only spend the effort to object where there is something to preserve. And, in most neighborhoods, neighborhood amenities have no “club” value. The neighborhood may not be very nice, so that the value of the neighborhood’s amenities is zero or negative. The neighborhood may have many other close substitutes, so that no one is willing to pay a premium for its amenities.  Or the neighborhood may enjoy particularly attractive amenities, but the zoning allows practically unlimited  development, preventing homeowners from capturing the value of those amenities. (Downtown neighborhoods tend to be a specific example of the latter). Development in neighborhoods like these tends not to spur NIMBYism.

There are plenty of neighborhoods, however, in which the value of neighborhood amenities is capitalized into home prices. These are neighborhoods with valuable amenities that lack close substitutes and which are, for lack of a better word, “under-zoned.” Homeowners in these neighborhoods have strong incentives to obstruct increases in zoning entitlements and to agitate for down-zonings in order to protect the value of club membership. And they do.

The foregoing is is just a sketch. In coming posts,I will discuss congestion and overuse externalities, environmental and social amenities, the concept of “prestige,” and the difficulty homeowners face in credibly signaling the effect of development on neighborhood amenities. I will explain why prestigious neighborhoods like down-zonings, and why historic preservation, which can be thought of as the ultimate down-zoning, is particularly popular. I will discuss why “neighborhood planning” is one of homeowners’ best tools for propping up club value. And I will try to explain why NIMBYism tends to spread from neighborhood to neighborhood and to intensify over time.

I will also discuss other types of regulation that should be thought of as zoning’s close cousin. Regulations that restrict parking to neighborhood residents, for example, are, like zoning, attempts to limit outsiders’ access to neighborhood amenities. When a neighborhood enjoys particularly good access to downtown or another amenity, this proximity is itself an amenity. In such neighborhoods, homeowners can be expected to oppose street connectivity in order to monopolize the benefits of this proximity.

I hope to work in some policy proposals. The chief one is, “When you find yourself in a hole, stop digging.” It may be politically impossible to loosen (much less eliminate) restrictive single-family zoning in established neighborhoods. But we can stop the practice of automatically applying single-family zoning to large swaths of suburban and exurban greenfield tracts. There is no particular constituency for zoning fringe greenfields exclusively for single-family use, so cities ought to stop doing it. This practice merely begets the next generation of NIMBYs. Those greenfields are tomorrow’s opportunities for infill.