Rethinking The Housing Affordability Crisis, Part 2
Source: belonging.berkeley.edu
Yonah Freemark, a senior research associate with the Urban Institute in Washington, DC, is someone I had the occasion of meeting a couple times in my career. A little more than ten years ago he worked for Chicago’s Metropolitan Planning Council, an independent nonprofit organization created in 1934. MPC’s mission then, and since, has been to challenge inequity and create stronger Chicago neighborhoods and communities. Freemark’s time there overlapped with my time at CMAP, Chicago’s federally recognized regional metropolitan planning organization. Our organizations routinely interacted with each other.
Freemark eventually left MPC and headed to MIT, where he would go on to earn a PhD in urban studies. While there Freemark completed a research paper in 2019 that examined the impact of upzoning on housing prices. Freemark was seeking to prove the hypothesis that an increase in housing supply would lead to lower housing prices.
The results didn’t quite turn out that way. His paper became notable because of one startling finding: “Chicago’s land-use reform–an upzoning of parcels near transit–produced a statistically significant rise in property values.”
Freemark, and many in the YIMBY community, were surprised by the results. Freemark is on record at X (formerly Twitter) that he neither “expected nor wanted this conclusion,” and offered several hedges: he limited his study to Chicago, and no other cities; he focused on property values and had no data on upzoning’s impact on rents; he hinted that the 5-year timeframe for analysis might not have been enough time to see actual upzoning affordability impacts. YIMBYs generally followed suit: as a city with negligible population growth for decades, Chicago might not have been the best city to study this phenomenon; the study period (2013-2018) came in the aftermath of the 2008 housing collapse and Great Recession; general affordability gains were made at the metro scale, not the neighborhood scale.
However, I expected this result. I touched on this subject as early as 2015, when I began to see urbanist consensus gather around upzoning as a policy panacea. My initial retort was that city conditions matter and need to be accounted for. What works for Silicon Valley, for example, might not work for Dallas, or Baltimore, or New York. But I now see it’s much more than that.
In the first part of this series, I noted that social and behavioral actions may better explain our nation’s affordable housing crisis than pure economics could. Seems economists are already working through a theory of what’s going on -- expectations-driven explosive appreciation, or simply put, exuberance.
What is housing exuberance?
It’s pretty self-explanatory. It’s the excessive excitement that homeowners or property owners feel they are about to cash in on the biggest investment they’ve probably ever made. Exuberance is vastly underrated as an actor in the modern housing market.
However, if you need a definition from a recognized source, the Federal Reserve Bank of Dallas provides a great explanation of expectations-drive explosive appreciation, putting social and behavioral actions into dry economic terms:
“(R)eal house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. If many buyers share this belief, purchases arising from a “fear of missing out” can drive up prices and heighten expectations of strong house-price gains.
This self-fulfilling mechanism leads to price growth that may become exponential (or explosive), resulting in the housing market becoming progressively misaligned from fundamentals until investors become cautious, policymakers intervene, the flow of money into housing dries up and a housing correction or even a bust occurs.
Expectations-driven explosive appreciation (often called exuberance) in real house prices has many consequences, including the misallocation of economic resources, distorted investment patterns, individual bankruptcies and broad macroeconomic effects on growth and employment. Monitoring the housing market in real time for the emergence of such booms in prices can help investors and policymakers respond before misalignments become so severe that subsequent corrections produce economic upheaval."
I don’t know if any urbanist researcher or housing market expert can definitively say when exuberance told hold of U.S. housing markets, but I’d say it roughly corresponds to the rise of NIMBYism in American metro areas in the 1970s. Maybe it can be dated to the post-World War II suburban explosion in the 1950s and ‘60s. Maybe it goes as far back as the 1920’s, another era that saw a strong economy and a rapid rise in homeownership. Maybe it’s been ingrained in the American psyche and economy since our nation’s founding; prior to the New Deal the American economy was much more defined, in all economic sectors, by explosive booms and disastrous busts, rather than the more modest growth and recessionary phases we’ve experienced since.
Whenever exuberance first impacted housing markets, I see it as the offensive facet to the defensively-oriented goals of NIMBYism. If NIMBYs are staunch protectors of things that may negatively impact their property values, then exuberance is the means that those protective measures are addressed. Defensive actions are rewarded when property owners can capitalize on them in the future.
The Role of Information
People of all types are always on the lookout for signs or indicators that allow them to make judgements on economic strength and vitality.
Anyone who grew up in 1970s Detroit like I did is familiar with the Goodyear national auto production billboards along Detroit’s freeways. Every year the signs would tick off the number of cars assembled by the Big Four (later Big Three) automakers. Drivers (always drivers) could witness the number start at zero at midnight on New Year’s and watch it grow into the millions over the course of the year. Detroiters were proud of it. The billboards were a visceral indicator of the health of Detroit’s – and the nation’s – economy.
But as the 1982 New York Times article I linked to notes, American auto production had peaked, foreign auto production (and sales) had exploded, and the billboards gradually diminished in importance in detailing the strength of the American economy:
“Goodyear erected the first billboard in 1964, a prosperous time for the auto industry, when 7,616,900 cars were sold and domestic manufacturers held 93.7 percent of the market.
The tire-maker, looking forward to more growth, commissioned two more billboards and, in 1973, a peak year for carmakers, added an extra slot to the boards in anticipation of car production reaching 10 million. It never did.
''Right after we did it production fell off,'' said Fred Stafford, vice president and account supervisor for Gannett Outdoor Advertising, which leases the signs to Goodyear. ''It was like the kiss of death.''
The billboards, of course, don't reflect direct surveillance of every assembly line in town. A production forecast, taking into consideration such variables as plant closings and strikes, is obtained on Fridays from the trade journal Automotive News and the figures are locked into the billboards' electronic system awaiting the beginning of a new production week at 8 a.m. Monday.
The signs are programmed to work at variable speeds in accordance with the production pace. The billboards can handle a car a second if the need ever arises. But these days, the rate has been one every seven to eight seconds.”
The billboards were discontinued in 2002.
Perhaps coincidentally, that was around the same time I saw more housing indicators being used to gauge the American economy. New construction housing starts began replacing auto production figures in the news. Rising construction employment became a leading indicator for future growth. State and metro area growth rate data became a proxy for determining where housing demand was strongest. Rapid housing price increases by metro area were stated.
Property owners noted the changes and responded accordingly.
Perhaps also coincidentally, housing market data exploded as the overall information revolution took place. The Case Shiller Home Price Index became omnipresent in business news. Technology allowed for greater refinement of data on new home sales, existing home sales, construction, inventory, and more. The data was put in front of millions of property owners who saw their properties in an entirely different way.
The result: a nation of homeowners becomes acutely aware of subtle changes that might impact the housing market. Homeowners who are sensitive to every announcement of a major commercial or residential development project and every report of a corporate headquarters relocation. Homeowners who note the comeback of some urban neighborhoods that had struggled for decades, indicating a modest change in living preferences, and an opportunity to capitalize.
The defensive practice of NIMBYism turned into the offensive practice of exuberant action.
Housing exuberance is evident in all markets. It creates high-priced housing in all metro areas, not only the ones widely noted for stratospheric or rapidly rising prices. In my first entry on this topic, I noted that Chicago, the nation’s third-largest metro area with nearly 9.3 million people in 2022, was the 89th most expensive housing market by median sales price of detached single-family homes in the 3rd quarter of 2023 (#1 largest metro New York was ranked eighth, #2 largest metro Los Angeles was ranked 20th). That puts Chicago ranked 36th of the 55 metro areas with a population over 1 million in 2022.
But when compared with similar larger metros the value proposition becomes clearer. Of the 18 metros with more than 3 million people, Chicago ranks 16th, above Houston and Detroit; of the 10 with more than 5 million people, Chicago ranks ninth, beating only Houston. By this measure Chicago is clearly one of the most affordable big metro housing markets in America.
Yet, considerable portions of Chicago and the metro area are as unaffordable as the highest-ranking metros on the lists. I also downloaded data specifically on median sales prices for the Chicago metro area, provided by the Mainstreet Organization of Realtors, a professional organization of Realtors in the Chicago area. Their list gathers data on each of Chicago’s 77 community areas (subareas of the city with anywhere from 5,000 to 100,000 residents) as well as the 300+ suburbs within the entire 3-state Chicagoland metro area.
The map below illustrates this. This map shows the 7-county Illinois portion of the Chicago metro area, which contains about 8.6 million of the metro area’s 9.3 million inhabitants. I’ve highlighted CCAs and suburban municipalities that had median sales prices of detached single-family homes in the fourth quarter of 2023 that were about twice the region’s median sales price of the period of $365,100 (I’m using $700,000+ here, in green), and the same jurisdictions that showed median sales prices that were approximately half of the median ($185,000, in blue):
The map clearly shows concentrations of high-priced single-family homes (Chicago’s north lakefront and the suburban North Shore, as well as several western suburbs), and low-priced single-family homes (much of the city’s South Side and south suburbs). Combined, the population of the highlighted jurisdictions is about 1.6 million people, or about 19 percent of the people living within the map’s boundaries. If you live or house-search in the areas that are green or adjacent to them, you may come away thinking Chicago is every bit as expensive as some coastal cities. Doing the same in the areas that are blue may lead to thoughts of Chicago having another affordability problem – low values that keep residents from building equity. Depending on where you live, and what you’re seeking in a new home, Chicago can be either very expensive, or not. It’s all in how one chooses to define the market (one significant note: with a focus on detached single-family home sales only, a lot of Chicago’s high-priced areas are simply not shown) .
I’m willing to make an assertion here. Housing markets that are particularly impacted by exuberance have nearly uniformly high housing prices. Yet housing markets far less impacted by it, like Chicagoland, still have pockets of extremely high-priced housing, as well as concentrations of extremely low-priced housing.
I see three factors that can contribute to housing exuberance: 1) changes in the growth rate; 2) segregation, and; 3) housing age, type and community composition. You can find out how in the next entry in this series.