“Do the Math!” How to Deal with Hot Housing Markets

San Diego, Urban Design, Urban Planning

Transect-LA-nathan-dumlao-539610This innocuous quote from a recent Texas Monthly Magazine article (here) shows how easily it is to misunderstand the forces that shape a hot-hot housing market cities:

“”The problem, of course, is that this idealized urban lifestyle is out of reach for most. The culprits? “Student loan debt, wage stagnation, rising rents, insurance costs, and the lingering aftermath of the Great Recession, which many millennials ran right into at a key career stage,” – Jason Dorsey, President of the Center for Generational Kinetics, an Austin-based research and marketing strategy firm that tracks social trends among millennials and Generation Z.

Ok, so rents don’t rise when wages stagnate. This is because “the rent” is determined by:

Wages x Employment ÷ No. of Units Available = Market Rate Rents*

OK, so while this *equation is simple… the basic point is that the rents are rising in hot housing market cities because our growing upper class wages are booming while the number of units available are limited. Higher wages x higher employment in cities that constrain new development makes for hot markets and high rents.

With wages somewhat stagnating for the shrinking middle class, we understand that rich/middle/poor people want to live in nice /fun/safe places. And, everyone is willing pay more/compete for access to the ‘good life’ in a city that has great amenities, such as arts, parks, rivers (think Austin and Denver), nice weather, beaches, bays (think San Diego), and most importantly lots and lots of jobs with some or all of this stuff (think Bay Area, Seattle, and Los Angeles).

This competition is seen in San Diego, as our rent has historically been high for my entire life, with very little fluctuation in either good times or bad. A recent Federal Reserve paper stated the reason for this is attributed to rental rates being determined more by the level of amenities our neighborhood’s provide than merely by supply of housing.

This factor still fits with the simple equation above as those cities with the good life are too few and far between and those nice places are unwilling to build enough housing to meet market demand… as people continue to look for places to spend their valuable time and money. With that, one neighborhood will be expensive for a variety of reasons, and a similar neighborhood only a few miles away will be stagnant or declining, while still having the same physical access to beaches and bays… just not the economic access.

What Mr Dorsey fails to understand about Austin is that those few units available in the urban fun/nice hipster areas are being rented by those few Sci/Bio/IT-tech engineers who are in high demand and making significantly higher wages (+$200k/yr) than the regular blue and white collar workers ($60k/yr). This drives up the rent in those few high-demand neighborhoods. Austin, and all cities, needs more housing/jobs with nice stuff in more neighborhoods rather than having big money fight for those few amenity-filled neighborhoods scattered throughout most cities.

And with that I feel myself sliding into the displacement/social justice trap. As displacement is the nasty common side effect of gentrification (value increases). So, I’ll put this out there again for your consideration:

The most appropriate urban design response to social justice is to build towards social/enviro/economic (jobs/housing) stability. To be clear, I am not advocating for displacement, but I am advocating for some gentrification in economically static neighborhoods (such as more schools, parks, and market-rate development opportunities) and some economic stagnation (such as subsidized housing and rent control) in hot markets.

This brilliant study shows that all of San Francisco is an expensive because it is affluent with a growing population and no land easily available for development. And, building more housing would reduce rents as it adds supply to the inherent demand. But, if they built enough new housing to reduce prices it would significantly change the character of the city and its quality-of-life… so, urban design will make a huge difference in how San Francisco builds its future! Go Sonja Truss!

Ultimately, our big west coast cities currently flourishing on the tech industry (ironically born in San Jose suburban garages) will continue to be successful into the future as our nation’s constricting economy pushes well-educated, financed people into these nice cities. And, they’ll continue to spill out excess jobs into neighboring cities, towns, and transform conventional suburban tracks (which are still being built, btw) into more urban places (despite their fighting this urban shift). Again, urban design is necessary to move our cities into the future.

By the way… Seattle and Denver have stabilized rents by building more housing. And, a few years ago Denver changed their conventional zoning to a form-based code in anticipation of their 21st century development needs. Need I mention the value of urban design again?

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