ENHR Conference June , 2013 Robert and Thomas Buckley

1. Housing in Big Cities:Why the Traditional Economic Model Doesn’t Appear to Work, at Least in New York ENHR Conference June, 2013 Robert and Thomas Buckley

2. Overview The theme is that traditional economic models of the housing market don’t work, particularly in big cities. The focus is on New York City’s housing supply as an example.

3. Why look at New York City’s Housing as an Example of Anything? Literary chauvinism: “ what is barely hinted at in other cities is condensed and enlarged in New York. New York is stirring, insupportable, agitated, ungovernable, demonic.” Saul Bellow

4. Why look at New York City’s Housing as an Example of Anything? More prosaically: The notion of super-star cities– places where the housing boom doesn’t end; Is successful urbanism the ability to attract the hyper-educated, so-called “creative class” as some suggest?

5. Why look at New York City’s Housing as an Example of Anything? "If New York City is a business, it isn't Wal-Mart -- it isn't trying to be the lowest-priced product in the market. It's a high-end product, maybe even a luxury product. New York offers tremendous value, but only for those companies able to capitalize on it." -- Mayor Michael BloombergJanuary 2003

6. Why look at New York City’s Housing as an Example of Anything? In short, are high-end, creative class-oriented cities the objective? If they are not…. How do we tell if a city is failing?

7. Want Eventually to Look at Other Cities Other Suspected “Failed Cities” in the sense described here: • Mumbai • Paris • Accra • San Francisco • So-called “Super-Star” Cities

8. Structure of Talk Three Parts • Discuss the traditional economics model; • Then use New York City’shousing market data to suggest why it doesn’t work; • Discuss whether or not a city fails in the sense that Acemoglu and Robinson suggest about Why NationsFail.

9. I. Traditional Model of Housing Markets • Known generally as the “filtering model.” It implies essentially that the city is a bath tub, and more importantly, that it doesn’t matter what side of the tub you use to fill it. • That is, it doesn’t matter if you assist the rich or the poor. The results will be about the same – the water rises. Housing “filters” down.

10. Tradition Model of Housing Markets • On the one hand, this sounds an awful lot like “trickle down” economics. That is, the poor benefit from the gains realized by the wealthy. Not a view that many embrace. • On the other hand, over the long-term, it works. Housing conditions of the poor improve without much assistance.

11. What Allows Filtering to Work in Housing Markets? • Housing lasts a long time. As a result, it is expensive in terms of current income. • This characteristic means that the poor cannot afford new houses. They have to consume houses filtered down to them. • It also means that the rich do not abandon their houses as they move up. They sell or rent them.

12. What Allows Filtering to Work in Housing Markets? • As a result, if the demand for housing increases by the higher income, they leave the units they are in and filter them down to a lower income group. • That group, in turn, leaves their housing and frees it up for still lower income families. • The result is that subsidies should be targeted on those who are most responsive, not those in the most need.

13. A Seemingly Naïve, Self-Serving Story • But, it works, at least over the long term, in many countries, and is the stylized sense of how housing markets work. • For example, consider the share of substandard housing in the U.S. – a country with very little in the way of housing subsidies for the poor.

14. Substandard Housing Over Time Prevalence of Plumbing Deficiencies Among Occupied Housing Units Year 1940 1950 1960 1970 1976 1991 % 55.4 34.0 14.7 5.5 2.6 2.5

15. II. But, the Argument is that this “theory” doesn’t work in New York Because housing in New York doesn’t filter down to lower income families the model and the city fails. What is the evidence of this? And Why Does It Indicate Failure?

16. Evidence:Housingin New York Is… Among the most expensive in the country; At the same time, it also has the most substandard, and crowded units, with the nation’s lowest vacancy rate.

17. Housing in New York Is also… • A place with the country’s largest public housing assistance program, and one of the largest public expenditures on housing development of any city in the world; • On the order of 2/3’s of the housing stock is in or controlled by the public sector; • But, it also has apartments that are among the most expensive in the world.

18. But, New York Has also… • Reduced the share of the housing stock controlled by the public sector by nearly 300,000 units in the past 30 years; • Restored nearly the entire stock of 100,000 housing units taken over by the public sector by the late 1980s. There is nothing left in public sector holdings to restore.

19. Filtering When an Adverse Shock Occurs NY in the 1980s • Jobs left; • Crime increased; • Population declined; • Some neighborhoods close to abandoned… • In short, 100,000 units would have been filtered out of the stock, but…

20. Filtering by the City • City took control of abandoned units – that the filtering model says would have been demolished -- and brought them back into the functioning stock; • However, this supply of affordable housing is about exhausted, at the same time that the supply of stabilized rentals has declined significantly.

21. Thus, over the past 30 years New York Has… • Reduced the stock of lower cost housing – through exits from the public stock and conversions – by almost the same amount that the housing stock increased. • It has demolished lower income housing at a high rate, and replaced them with more expensive housing. • At the same time population increased by over 1 million.

22. Over the past 30 years New York alsoHas… • Subsidized low-rise brownstone housing – property taxes 1/5th the rate of multi-story buildings; • Height restrictions also limit supply; • Manhattan considerably less dense now than it was in 1950, and certainly than in 1900; • That is, charming but costly supply restrictions.

23. The Result is… • That the housing conditions of the poor and middle class had to deteriorate. • For example, despite being the richest city and having the biggest income gains in U.S. – think of the period before the financial crisis – average New York conditions are relatively bad.

24. Percent of Dwellings of Adequate Quality Across Seven • U.S. Metropolitan Areas Metropolitan Area/Location Renter Owner • City Renter Owner • Atlanta 87.0 91.7 • Baltimore 83.6 96.1 • New York 81.4 95.4 • St. Louis 93.1 96.1 • San Diego 94.4 98.9 • Seattle 93.4 97.7 • Washington, DC 86.9 96.7

25. Physical Problems of Housing Units in the United States and Selected Cities Area Year Severe Problems ModerateProblemsBuiltbefore 1930 United States 2.0 4.7 13.6 New York City 7.6 6.2 40.9 Chicago 3.8 7.6 37.1 Los Angeles 5.0 7.1 11.4 Boston 2.5 7.1 52.0 San Francisco 6.5 9.4 39.0 Philadelphia 3.2 6.9 44.3 Houston 1.9 12.1 3.2

26. So Why Did New York not Filter? Two general explanations from economists: • Changes in Income Distribution; and • Various Urban Policies. First, consider income distribution.

29. Filtering and New York’s Income Distribution • These are not numbers that lead one to suspect that the poor are going to be better off; • These are numbers that produce $40,000 per month rents, as well as numbers that won’t be helped by subsidies to high income developments, as is going on.

30. But, while Income Distribution Changes have been adverse… • Other issues matter too…. • In particular, urban policies. • Again, New York is one of the most expensive cities in the country. But, in some ways this is to be expected, given the financial sector trends noted above.

31. Urban Policies As a result, it is not surprising that even though it is very expensive, the city’s real estate did not suffer greatly from the Great Recession. For example, the price declines and increases since have been minimal.

32. House Price Trends U.S.

34. House Price Trends: New York vs. Other American Cities • Started the Great Recession at much higher level; • Didn’t fall nearly as much as most and is now in a seller’s market. • Did Shiller, of Irrational Exuberance, get it wrong?

35. III. Thinking About this Situation from Economics Perspective • Economists tend to focus on housing market in isolation not as part of the larger fixed capital stock that is the city – any policy distortion, in this view, is inefficient. • But, could it be that within a broader sense of the city, these policies simply offset the spatial implications of changes in income distribution or other distortions?

36. Thinking About How Cities Might Fail • Could it be that policies to change regulations to allow greater in-fill of population or better targeting of housing subsidies are much more than distortions? • Are they policies which attempt to offset even the even greater penalties that the poor face?

37. Thinking About How Cities Might Fail Why Does the Failure to Filter indicate a City which has failed? Model Failure Suggests that the City is not Inclusive in the Acemoglu and Robinson sense. That is, the benefits of economic growth are increasingly segregated to a few.

38. Thinking About How Cities’ Failures Might Be OK • In a “system of cities” sense, a city’s becoming too expensive isn’t a failure. It is a signal to develop other cities’ comparative advantages. • In a global economy the bright lights of the city are indeed very bright in many places. How does one cope with the migrations that these differentials induce?

39. Conclusion • What Happens to Cities that Show Spatial Signs of Increased Income Inequality? • Or to cities following increasingly restrictive supply policies? Do they fail? Or is Mayor Bloomberg right?