Finally, a book by a New York Times reporter who understands the crucial link between restrictions on the supply of housing and the price of housing! Golden Gates, by economics reporter Conor Dougherty, is a tour de force. It’s a rare book that mixes careful, nuanced reporting, painless economics lessons, interesting history of California, and pitch‐perfect humor, but Dougherty has written one.
Dougherty, who was a housing reporter for the Wall Street Journal for a decade, must have learned a lot in that job. He knows and understands the economics literature on the connection between supply and price, as evidenced by his treatment of the pathbreaking work of Harvard’s Ed Glaeser and Wharton’s Joseph Gyourko. (See “Zoning’s Steep Price,” Fall 2002.) Furthermore, Dougherty understands that when more luxury housing is built, that frees up housing that is then sold to people slightly lower on the wealth scale, and on down. He also understands the negative consequences of rent control.
That’s not to say that I agree with everything in the book. In particular, the author underplays both the bad consequences of rent control and the good that would result from massive housing deregulation. But those defects are way more than offset by his understanding of the harm done by restrictions on building.
This is from David R. Henderson, “The Solution to Expensive Housing Is More Housing,” Regulation, Spring 2021. It’s the lead book review, an honor I rarely get.
Another highlight:
Early in the book, Dougherty introduces a number of important players. First is a colorful character named Sonja Trauss, a teacher in the East Bay who dropped out of the doctoral economics program at Washington University in St. Louis, emerging with a master’s degree. Trauss started San Francisco Bay Area Renters’ Federation, an organization that favors allowing more housing to be built. She was an early advocate of YIMBY (Yes In My Back Yard), the opposite of NIMBY (Not In My Back Yard). As Dougherty puts it, “Sonja was for anything and everything, so long as it was built tall and fast and had people living in it.” Trauss later became a full‐time activist for the cause of more housing, and Dougherty tracks her movements carefully.
Trauss has a way with words and Dougherty has a keen ear for those words. She understands 19th‐century writer Frederic Bastiat’s point about the unseen consequences of government regulation. At a hearing in the East Bay city of Lafayette, she pointed out that many of the people who would be affected by a decision to allow more housing “don’t know who they are yet” and that some of them are not even born. It’s Bastiat’s seen versus unseen.
One more highlight:
The book also discusses Harvard labor economist Lawrence Katz. Few people probably know — I didn’t — that when he graduated as Berkeley’s top economics undergrad, Katz devoted his whole 1981 commencement speech to one of the main causes of the high price of housing in the Bay Area: restriction of supply. He pointed out something that few of his classmates probably knew: just 10 years earlier, “California house prices were not much greater than the national median.”
Read the whole thing and read the book.
Addendum
A comment by KevinDC below motivated me to add this excerpt from my review:
As someone who, for over 40 years, has advocated cutting high marginal tax rates, I can attest that I have yet to see one of my allies advocate “trickle down” tax cuts. But one area where the term does apply is in housing. Many Californians oppose allowing people to build luxury houses because they think that won’t help people who can’t afford such luxury. They’re wrong. Dougherty quotes a software engineer and Trauss ally, Vincent Woo, who said at a 2016 San Francisco Board of Supervisors hearing:
If we don’t build units for people with money to go into, we all know what’s going to happen. They’re going to compete [for] the existing stock for middle income housing residents, and we know who’s going to win, the people with more money.
Allowing luxury units to be built, by contrast, would free up housing for people with less income. You don’t see a lot of low‐income people driving new Cadillacs, but you do see some of them driving 10‐year‐old Cadillacs.
READER COMMENTS
Jon Murphy
Mar 25 2021 at 1:40pm
This is a very, very important point. When people argue that electoral outcomes reflect voter preferences, we can see that’s not the case. Voters are often unaware of the costs that face them.
KevinDC
Mar 25 2021 at 1:53pm
This reminds me of Bryan’s model of “reverse musical chairs” from just a few days ago!
On a related note, I and many others often harangue people for conflating changes in supply with changes in quantity supplied. To a non-economist, it just seems obvious that if more of a given good has been created, such as more housing being built, that means there has been an “increase in supply.” But of course that’s not true – moving along the supply curve is different from shifting the supply curve. You can have a decrease in supply and an increase in the quantity supplied occurring simultaneously. It’s an elementary but extremely common mistake, but I see it occurring in discussions about the housing market more often than anywhere else.
David Henderson
Mar 25 2021 at 3:16pm
Kevin,
I’ve always made that point a different way, with new and old luxury cars. Your comment motivated me to add an addendum in the original post, a segment from my review.
Phil H
Mar 26 2021 at 1:51am
“I and many others often harangue people for conflating changes in supply with changes in quantity supplied…It’s an elementary but extremely common mistake,”
I feel you. Just the other day I saw an actual economics professor writing this:
“Every new structure built makes the competition for housing a little milder,”
Keep up the good fight!
KevinDC
Mar 26 2021 at 9:27am
If you think the observation “Every new structure built makes the competition for housing a little milder” in the context of a discussion of how reducing housing regulations impacts the housing supply, is somehow an example of conflating a change in supply with a change in quantity supplied, you are simply confused about how the models work. I’m trying really hard to see how you think this is an example of such a conflation, but I’m genuinely stumped.
Housing regulation both restricts the supply of housing, and makes the supply curve much more inelastic, i.e., the supply curve gets much steeper. When this happens, an increase in the quantity supplied is met with a large increase in prices. (You can just draw out a basic model with a steep, leftward shifted supply curve and and see this for yourself.) Ergo, in places with heavy housing regulation, that is, where supply is both restricted and inelastic, you’d expect increases in quantity supplied to be met with price increases and heavy competition – which is exactly what we observe empirically and historically. See, for example, the paper Regulation and the Housing Supply, published a few years ago in the National Bureau of Economic Research, which reviews and sums up the literature as: “In particular, regulation appears to raise house prices, reduce construction, reduce the elasticity of housing supply, and alter urban form.”
But Caplan, and Dougherty, and David Henderson, along with basically every other economist ever who has studied the housing market are making a different point here. They’re talking about how easing housing regulation affects the market by increasing the housing supply, not merely by increasing the quantity of housing supplied. When housing regulations are loosened and therefore supply increases and becomes more elastic (i.e., the supply curve is allowed to shift to the right and flattens out), then you see lowering of relative housing prices and decreases in competition for new housing, even as the quantity of housing supplied increases – which, again, is exactly what we observe empirically and historically. In our previous discussion I sent you links to multiple studies and published papers with evidence for this. If you like, I’m happy to point you towards even more – these are some of the most carefully studied and overwhelmingly supported conclusions in the entire field of economics.
On a side note, it did stand out to me in our earlier exchange how you declared that neither I nor anyone else has any theory about how competitive the housing market is. That was fairly interesting. You didn’t ask what such a theory was, or if we had such a theory, how it would be measured empirically, etc. You just flat out declared, as fact and up front with no inquiry, that no such theory exists. But of course, that’s not true – economists have theoretical and empirical measures for how competitive the housing market is as they do for how competitive the labor market is. Maybe you were just having a cranky moment – I get it, I get cranky sometimes too. But declaring upfront, without any inquiry, that “nobody knows such and such”, instead of genuinely asking “how do you know such and such,” is usually a sign that someone is precommitted to their conclusion and isn’t willing to consider they might be mistaken. But I hope that I am mistaken in my reading of the situation!
Phil H
Mar 26 2021 at 11:59pm
You’re stumped, I’m stumped… the difference is, I’m reading.
Here’s what you say:
“Caplan…talking about…increasing the housing supply, not merely by increasing the quantity of housing supplied.”
Here’s what Caplan says:
“Every new structure built…”
You’re just wrong about what he said. It’s written there in black and white. Maybe he mistyped. But the words he use clearly refer to a numerical increase in the number of houses.
“you declared that neither I nor anyone else has any theory about how competitive the housing market is”
Not quite. I said you didn’t have one. I used my superpower of telepathy (called language). When we’re talking about a subject and a person fails to mention *very* relevant knowledge, that indicates that they don’t have it.
“You just flat out declared, as fact and up front with no inquiry, that no such theory exists.”
I absolutely did not do that. I know it does exist (because I have one!). I just said you didn’t have one, which was definitely true at that moment. If you had, you would have mentioned it. That’s how conversations work, especially when you’re so very very very keen to prove me wrong.
KevinDC
Mar 27 2021 at 8:25am
You’re leaving an awful lot of relevant information out in the ellipsed section where you quote me. I point out at the start of my comment that the discussion in that post was occurring in a “context of a discussion of how reducing housing regulations impacts the housing supply.” Caplan’s post wasn’t about how building more houses by itself becomes like reverse musical chairs. His post was about how housing deregulation makes building new houses work like reverse musical chairs. Yes, building more houses is increasing the quantity supplied, but it’s explicitly described as occurring under the context of a simultaneous increase in supply. Hence my full comment that Caplan is “talking about how easing housing regulation affects the market by increasing the housing supply, not merely by increasing the quantity of housing supplied.” Notice I didn’t say “instead of increasing the quantity supplied.” I said not merely by increasing the quantity supplied. So, yes, you are reading (always a valuable life skill!), but I suggest you read more carefully. Caplan’s full statement, which you also only partially quote, was “Deregulating construction won’t instantly deliver high-quality, affordable housing to everyone. Instead, it’s like my game of reverse chairs. Every new structure built makes the competition for housing a little milder, until practically everyone comes out a winner.” The thing explicitly being identified as being like reverse musical chairs is deregulating construction – aka, increasing the housing supply. If you ignore the specific context and background that’s laid out for the thought experiment, and simply pick out the words “Every new structure built” in isolation, you’ll completely miss the point of the argument.
Regarding theories of how competitive housing markets are – you’re right, you didn’t say there was no such theory, you only said I didn’t have one. Still, I think this is an unwise heuristic:
When a talk is occurring in comments on a blog, lots of relevant knowledge is going to be left out – and I don’t assume the other person is lacking it without at least asking first, or to at least show me where I can find that information! Basic principle of charity there. For example, you had initially made the claim that the per capita housing stock in the US is far higher than its ever been. I checked some data sources and found this wasn’t supported (and have looked into additional data sources since then, with the same result!). But I also asked you a couple of times if you could share with me the data source you used to make that claim. You never responded to those requests – by your reasoning here, I should assume you had no such information or knowledge, and assuming you just make stuff up. But obviously that would be silly of me and unfair to you.
But while I didn’t lay out an explicit model of housing market competition, I did send you links to multiple papers which do cover things like the level of competition in the housing market – and I also just offered to send you even more. So, sure, I may not fully explain all relevant information in a blog comment – but who does? At least I make an effort to highlight where you can find such information! Give me a little credit here 😛
Jon Murphy
Mar 27 2021 at 10:02am
This is a very important point, KevinDC. Phil H said:
Phil’s statement leaves out an important element: knowledge relevant to whom? Relevancy is a subjective characteristic. As experts, whenever we are discussing anything (even to our own colleagues), we must make a choice of which information and knowledge is relevant to include and which is not. This goes doubly when speaking to the public. So, what the expert considers relevant knowledge may not be what the non-expert considers relevant knowledge. This is one of the elements of the Hayekian knowledge problem and what I discuss in my current working paper Cascading Expert Failure.
So, let’s take an example: trade. I write and lecture that tariffs reduce people’s well-being. That is the basic trade model. Are there exceptions? Yes. There are lots and lots of arguments, models, and thought experiments out there that indicate tariffs may not reduce well-being; indeed, in some select cases they may enhance well-being! If, in the course of a conversation, I do not mention these myriad of exceptions, it does not imply that I have no knowledge of such. Indeed, you cannot infer anything from an absence. I may have no knowledge. Or, as in this case, I have lots of knowledge but deem it irrelevant.
Consequently, the person I am talking to may deem knowledge of these trade exceptions relevant. If so, then the discussion changes. If that person asks “hey, what about this or that exception,” and I respond “oh, I didn’t know about that,” then and only then can you reasonably claim a lack of knowledge.
KevinDC
Mar 27 2021 at 10:38am
That sounds like a very interesting paper Jon! I look forward to its publication.
Your comment about the relevance of background information also makes me think of one of Krugman’s best essays – Ricardo’s Difficult Idea. He highlights a lot of the difficulties encountered when experts in economics talk to non-experts, and how sometimes background information that seems to an economist too obvious to mention simply isn’t understood by the non-economist, which can mislead them into thinking they’ve made some kind of devastating takedown of economic models they don’t actually understand. He says of Michael Lind, for example:
Also, Krugman describes the following exchange with a journalist who covers economics:
A lack of shared background information is one of the more underrated obstacles to productive discussion – but it’s surmountable, if people are willing to grant interpretive charity, make genuine inquiries, and put in the effort. Usually.
Jon Murphy
Mar 27 2021 at 11:40am
Thanks! I actually forgot to include a link to the current version. It’s on SSRN. The paper is currently under review at a journal, but if you have any feedback I am all ears.
Yeah this is a huge point. There’s something of a “language barrier” between the expert and the non-expert. Some causes of expert failure are not on the part of the expert (the supplier of opinion), but of the non-expert (the consumer of opinion). Things can get lost in translation.
One of my favorite examples is “cost.” To the economist, cost means whatever is given up to take an action. To most people, “cost” means monetary price or unwanted consequence. So, we get a lot of folks who think they can simply do a cost-benefit analysis like an accountant: reduce everything to monetary outlays and incomes, throw in an NPV to take into account for time, and call it a day.
Alan Goldhammer
Mar 25 2021 at 1:55pm
Thanks for the review, it has piqued my interest in the book. We are experiencing this issue here in out inside the DC Beltway community. Unfortunately, the housing that does get built is at the high price point. The county does have an abatement clause for subdivisions where there will be more than 20 units that provides a benefit if affordable units are built as part of the subdivision. We just experienced this about 1/3 mile away in a complex called Bethesda Mews. They built the usually big houses but included two duplex units (4 moderately priced houses) that do not have garages which is where they save space. The price of units is controlled by the county as is the resale. It’s too complicated to go into here but it seems to be working. A second parcel of land nearby is now being developed but for only 18 units, so there is no requirement for moderately priced units.
We are all waiting to see what happens with a 12 acre parcel right in the middle of Chevy Chase that was just sold by the 4-H foundation. It will now be developed into housing but I’m sure this will be $1.5M and up. These are one off examples as there are not for the most part vacant parcels of land to be developed. When this is the case we see only high price housing go up. The same is true for condos and apartment buildings in downtown Bethesda. Nothing being built is affordable by anyone making $75K or less.
robc
Mar 25 2021 at 4:25pm
The point is, that doesn’t matter (much). People moving to high price points open up lower price points for everyone to move up the ladder. Extra supply lowers the price for everyone.
An even bigger fix though would be to end residential zoning. Limiting a zone to single family homes leads to things like building 1 million dollar home instead of 4 500,000 townhouses.
The developer would make more on the latter, but can’t do it.
john hare
Mar 25 2021 at 3:57pm
The low end housing that I have lived in most of my life was middle class housing when it was built decades back. And the much of the middle class housing of today was high class housing when it was built decades back. Most people are unaware that modern indoor plumbing with running water was for the rich only just over a century ago. There are plenty of people alive today that grew up in houses without electricity. The log cabins of yore often had dirt floors.
The cookie cutters of today (track houses) would have been luxurious just a few decades back.
robc
Mar 25 2021 at 4:26pm
I think my Mom was about High School age when they got electricity. And she had left for college before her parents had indoor plumbing.
She is in her 70s.
David Seltzer
Mar 25 2021 at 4:21pm
Excellent. An anecdote about my father, himself something of an applied libertarian and economist. He was a small merchant in the steel town of Gary Indiana. We lived in a small bungalow. As his wealth increased, we moved into a larger home with air conditioning. In the 1950’s this was a luxury. When we moved, he hadn’t sold our previous home yet. He decided to rent it to a newly arrived immigrant family from Poland. Two things were achieved. He kept his capital investment. The family who could not yet afford to buy the house was still able to live in a better home just by renting from an agreeable landlord.
sean
Mar 25 2021 at 4:44pm
I’ve been traveling around a bunch lately. The biggest problem I see is America doesn’t have a city that builds housing well. Houston has cheap housing, but its all spread out. Other big cities the housing they do build seems to be giant towers. Luxury apartments and condos get very annoying after a while. Why can’t we build cities like European cities that are dense by building 5 story heights without huge gaps between buildings. I consider that sort of building as far more livable than our unaffordable cities or our cities that are take a car everywhere.
I guess that would require a middle ground neither of our political parties are very good at. A mix between super regulated and super unregulated.
Lizard Man
Mar 25 2021 at 8:45pm
In Raleigh at least, a lot of redevelopment and some new developments are around 4-5 stories talll. The latest edition international building code, which forms the basis of a lot of building regulations throughout the US, stipulates some things about wood frame construction and recommends against having more than 4 or 5 stories of it, so developers have taken to building the ground floor and any underground floors from steel and concrete and then adding 4 floors above ground level as the most economical way to build.
MarkW
Mar 26 2021 at 7:56am
Why can’t we build cities like European cities that are dense by building 5 story heights without huge gaps between buildings. I consider that sort of building as far more livable than our unaffordable cities or our cities that are take a car everywhere.
Of the U.S. can build such cities and there are many existing ones to choose from where you could live. I know that Chicago has a lot of housing like that in the neighborhoods — some of it newly built. It took me about 10 seconds on Zillow to turn up this listing as an example. But why aren’t ‘new’ growing cities in the Sunbelt being built that way? Because your preferences are not widely shared by residents there. (They’re not shared by me either. I prefer a detached house in a quiet neighborhood with green space and doing my grocery shopping by car rather than bus).
Walter
Mar 25 2021 at 9:28pm
Some things I think that economists often overlook with respect to housing supply is the type of housing and transportation costs. For example, in my hometown of Seattle there has been a lot of increased density and conversion of single family homes to apartment buildings, with limited increase in transportation infrastructure (one could argue substantial decrease relative to population growth). The county is building more light rail but is generally opposed to increasing road and freeway capacity.
What has occurred is a general decrease of available single family homes, and an increase of small apartments. While there are more people who desire single family homes moving farther away from the city, they are limited by the cost of transportation. Thus single family home values in the core of the city and the suburbs have been skyrocketing, and lower income families with children who do not want to live in an apartment in the city have to commute from outlying areas and face a much higher burden of sitting on overcrowded highways and streets in order to provide a suitable place for their children to grow up.
Thus the restriction on transportation infrastructure is also a huge driver of housing prices as people must pay a higher and higher portion of their income to reduce their time and transportation costs.
(Queue the “no one should want to live in a single family home” responses)
Lizard Man
Mar 27 2021 at 4:18am
Living in a cramped apartment is a lot better than living in a car or on the streets.
MarkW
Mar 27 2021 at 7:17am
Thus single family home values in the core of the city and the suburbs have been skyrocketing, and lower income families with children who do not want to live in an apartment in the city have to commute from outlying areas and face a much higher burden of sitting on overcrowded highways and streets in order to provide a suitable place for their children to grow up.
Aren’t jobs starting to migrate out of Seattle to outlying areas along with the people? And there’s REI who sold off their fancy new HQ in the region in favor of distributed small hubs and remote working. But if you’re a lower-income worker, your job is likely not specialized and could be done pretty much anywhere in the country. So don’t remain in an area that offers only a devil’s bargain in a choice between a long commute and a tiny apartment.
Walter
Mar 31 2021 at 9:46pm
MarkW, Bellevue is not an outlying area of Seattle. It is one of the closest suburbs and is directly across Lake Washington from Seattle and has rapidly urbanized over the last 10 years. There are high rise buildings going up every year, but there is not expansion of roads. Even the light rail they are planning to build in the future to transport people from Seattle is unfortunately being built at least a mile from downtown Bellevue on the other side of a freeway and down a large hill.
The point I was trying to make is that transportation costs directly affect housing costs, which I think most people on these boards will agree. Whether they agree that it is not emphasized enough by economists who advocate increased housing supply is another point.
Lizard Man, most people living on the streets in the Seattle area suffer from profound drug addiction and mental illness, and that is a topic for another discussion. Places like San Francisco and Los Angeles, where I live currently, have tried to build housing for the homeless but it is an incomplete solution and seems to expand the problem. Again, a great topic for the esteemed authors on this forum to discuss.
Mark Z
Mar 26 2021 at 3:22am
The difference between local and global (or, well, national) effects of housing deregulation are perhaps important: building new luxury housing in San Francisco frees up mid or low-level housing somewhere, but not necessarily in San Francisco, if it’s mostly migrants who are moving into them, so from the perspective of San Franciscans, it may seem like rich people are just spawning and taking up precious space (or to the extent that San Franciscans only care about San Francisco, they may get little consolation from the fact that they’re helping to make housing more affordable in Denver or Phoenix).
I don’t know if this is actually true, maybe new luxury housing tends to free up lower level housing nearby, but it’s at least plausible that luxury housing in City A mainly makes housing more affordable in City B. In that case, housing regulation may be something of a prisoner’s dilemma. All cities would be better off if all cities deregulated housing, but individual cities may have little incentive to deregulate if the new affordable units it makes available are mostly in other cities.
robc
Mar 26 2021 at 7:10am
This is true, but it is still probably more localler. It isn’t so much that building in SF makes Denver housing cheaper, but it makes Oakland housing cheaper.
I have it before, but SF should look like Manhattan and Manhattan should look like Sci-Fi. But the people who can afford single family homes in San Francisco proper (Pelosi, et al) don’t want to live next door to a 9 story condo building.
MarkW
Mar 26 2021 at 8:08am
The Solution to Expensive Housing Is More Housing
Yes, and it doesn’t have to be in the regions that restrict development. To be honest, I am tending toward the beliefs that A) California will not do much to ease restrictions, and B) it doesn’t much matter. As a country, we’re probably better off if population growth continues to shift to other regions with saner government. I understand that CA, NY, and Illinois are likely to lose congressional seats based on the 2020 census while Texas, Arizona, and Florida are projected to gain more. In the long term, foot-voting is probably how the housing price problems will actually be addressed.
Mark Barbieri
Mar 27 2021 at 10:19am
Cities should be deprived of federal housing assistance if their housing stock doesn’t grow with their population.
john hare
Mar 27 2021 at 1:55pm
Agreed. Federal money goes through too many hands to be the best solution to the housing problems in a city. Let the money stay with the city taxpayers, as well as other taxpayers that subsidize them, and let the city work its’ own set of problems.
Comments are closed.