NewGeography.com blogs

Economist Thomas Sowell, who has taught at Cornell University and UCLA and has worked at the Urban Institute and the Hoover Institution at Stanford University summarizes the economics of the housing market in a recent article:

"Anyone who has taken Economics 1 knows that preventing the supply from rising to meet the demand means that prices are going to rise. Housing is no exception."

Sowell's cites the high prices houses for sale in the San Francisco Bay area suburb of Palo Alto. Three catch his eye:

About the first house, he says: “The house is for sale at $1,498,000. It is a 1,010 square foot (94 square meters, added by author) bungalow with two bedrooms, one bath and a garage. Although the announcement does not mention it, this bungalow is located near a commuter railroad line, with trains passing regularly throughout the day."

The second house has 1,200 square feet (111 square meters) and was listed for $1.3 million. Intense competition for the house drove the sale price to $1.7 million.

The third, with 1,292 square feet (120 square meters) and built in 1895 is on the market for $2.3 million.

Sowell continues: "There are people who claim that astronomical housing prices in places like Palo Alto and San Francisco are due to a scarcity of land. But there is enough vacant land ("open space") on the other side of the 280 Freeway that goes past Palo Alto to build another Palo Alto or two -- except for laws and policies that make that impossible. As in San Francisco and other parts of the country where housing prices skyrocketed after building homes was prohibited or severely restricted, this began in Palo Alto in the 1970s."

As in Palo Alto, outrageous price increases began in the San Francisco Bay Area in the 1970s, and were the predictable outcome of urban containment policies (smart growth policies) that rationed land for development.

House prices are three times as high relative to incomes in the Bay Area than they were before urban containment regulation began in the early 1970s. Among New World (US, Canada, Australia and New Zealand) major metropolitan areas, only Vancouver has higher house prices relative to incomes.

According to the U.S. Census Bureau, Chicago’s population peaked a long time ago.  In 1950, Chicago had 3. 6 million people. Recent estimates put Chicago’s population at 2.7 million. With the growth of American suburbs, many Chicago families have fled to public schools in the suburbs. Chicago’s horrible public schools have been an embarrassment for Chicago’s elite. A recent Chicago Tribune editorial estimated that only “only 8 of 100 freshmen who enter Chicago public high schools manage to get a college diploma.”  

In an attempt to keep white families from fleeing Chicago, the second Mayor Daley came up with a plan:  test-admittance-only public high schools. This was a reasonable solution for gentry liberals who pay high property taxes but didn’t want to leave the city or couldn’t afford to send their children to private schools. These select public high schools produce college bound students while “limiting” gentry liberal’s children from being exposed to children from “troubled backgrounds”. This is a sensitive subject because Chicago’s Public School System is only 9.2% white, while being 39.7% African-American.

Being admitted to these select magnet schools can often determine whether a family stays in Chicago or moves elsewhere. Recently, Daniel Hertz made news by graphically showing how Chicago’s middle class has being largely eliminated since 1970. The new Chicago is still a one-party town, but is now a coalition of rich and poor with a residual government worker middle class. White children have left Chicago’s Public School system leaving minorities as the majority. But, who gets into the selective public high schools?  The Chicago Sun-Times reports:

More white students are walking the halls at Chicago’s top four public high schools.

At Walter Payton College Prep on the Near North Side, more than 41 percent of freshmen admitted the past four years have been white, compared to 29 percent in 2009, a Chicago Sun-Times analysis of Chicago Public Schools data has found.

At Jones College Prep in the South Loop, 38 percent of this year’s freshman class is white, compared to 29 percent four years ago.

In 2010 — the first year race was no longer used to determine the makeup of Chicago schools — the percentage of white freshmen at Northside College Prep in North Park rose from 37 percent to 48 percent.

And at Whitney Young College Prep on the Near West Side, the percentage of black freshmen has steadily declined in the past three years, while the percentage of whites has risen.

As these schools attract white students, Mayor Rahm Emanuel had to shut down 50 public schools which according to Democracy Now affected” 30,000 students, around 90 percent of them African American.” While Chicago is closing public schools, it is getting ready to build a new school. Not just any public school, but an expensive test only admittance high school named after Chicago’s glorious leader who went far. The new high school will be named Barack Obama College Preparatory High School.

Gentry liberals leaders have told us with enormous conviction that public education is an “investment”. Yet, President Barack Obama and Mayor Rahm Emanuel send their children to elite private schools. What’s interesting in Rahm Emanuel’s case is he couldn’t find one public school in all of Chicago good enough to send his children. Mayor Rahm Emanuel is so committed to public education that he sends his children to a private school 15 miles away from where his children live.

Time Magazine's Sam Frizell imagines that the American Dream has changed, in an article entitled "The New American Dream is Living in a City, Not Owning a House in the Suburbs." Frizell further imagines that "Americans are abandoning their white-picket fences, two-car garages, and neighborhood cookouts in favor of a penthouse view downtown and shorter walk to work." The available population data shows no such trend.

Frizell's evidence is the weak showing in single family house building permits last month and a stronger showing in multi-family construction.

This is just the latest in the "flocking to the city" mantra that is routinely mouthed without any actual evidence (see: Flocking Elsewhere: The Downtown Growth Story). The latest Census Bureau estimates show that net domestic migration continues to be negative in the core counties (which include the core cities) of the major metropolitan areas (those with more than 1,000,000 residents). The county level is the lowest geographical level for which data is available.

At the same time, there is net domestic inward migration to the suburban counties. Moreover, much of the net domestic migration to metropolitan areas has been to the South and Mountain West, where core cities typically include considerable development that is suburban in nature (such as in Austin, Houston and Phoenix). As the tepid "recovery" has proceeded, net domestic migration to suburban counties has been strengthened (see: Special Report: 2013 Metropolitan Area Population Estimates), as is indicated in the Figure.

There is no question but that core cities are doing better than before. It helps that core city crime is down and that the South Bronx doesn't look like Berlin in 1945 anymore. For decades, many inclined toward a more urban core lifestyle were deterred by environments that were unsafe, to say the least. A principal driving force of this has been millennials in urban core areas. Yet, even this phenomenon is subject to over-hype. Two-thirds of people between the ages of 20 and 30 live in the suburbs, not the core cities, according to American Community Survey data.

To his credit, Frizell notes that the spurt in multi-family construction is "not aspirational," citing the role of the Great Recession in making it more difficult for people to buy houses. As I pointed out in No Fundamental Shift to Transit: Not Even a Shift, 2013 is the sixth year in a row that total employment, as reported by the Bureau of Labor Statistics was below the peak year of 2007. This is an ignominious development seen only once before in the last 100 years (during the Great Depression).

In short, urban cores are in recovery. But that does not mean (or require) that suburbs are in decline.

"Free Exchange" in The Economist has come down strongly on the side of economics in a review of housing affordability.

According to The Economist, the unusually high cost of housing in San Francisco (and other places) is principally the result of tight land use regulation, which makes it expensive or impossible to build. If "local regulations did not do much to discourage creation of new housing supply, then the market for San Francisco would be pretty competitive." Add to that Vancouver, Sydney, Melbourne, Toronto, Portland and a host of additional metropolitan areas, where urban containment policy has driven house prices well above the 3.0 median multiple indicated by historic market fundamentals.

The Economist explains the issue in greater detail: "We therefore get highly restrictive building regulations. Tight supply limits mean that the gap between the marginal cost of a unit of San Francisco and the value to the marginal resident of San Francisco (and the market price of the unit) is enormous. That difference is pocketed by the rent-seeking NIMBYs of San Francisco. However altruistic they perceive their mission to be, the result is similar to what you'd get if fat cat industrialists lobbied the government to drive their competition out of business." (Our emphasis).

Of course urban planning interests have long denied that that rationing land is associated with higher housing prices (read greater poverty and a lower standard of living). Nonetheless urban containment policies not only drive up the price of land, but do so even as they reduce the amount of land used for each new residence, driving prices per square foot of land up as well.

The Economist notes that unless the direction is changed, housing policy will continue to be "an instrument of oligarchy. Who knows. But however one imagines this playing out, we should be clear about what is happening, and what its effects have been."

The travel website escapehere.com has published an article with a list of the world's "10 most dangerous cities to travel." I was obviously interested, but was soon deterred by advertisements that kept popping up and a web architecture intended to ensure that for every city viewed another ad would be placed in the way.

At the same time, this could be important information, and is especially untimely for Rio de Janeiro, which will soon host World Cup and Olympics events. So I put up with the inconvenience, with the intention of making the information more readily available (the explanations were very short).

Here is the list, according to escapehere.com, in order of dangerousness.

1. San Pedro Sula, Honduras

2. Karachi

3. Kabul

4. Baghdad

5. Acapulco

6. Guatemala City

7. Rio de Janiero

8. Cape Town

9. Ciudad Juarez

10. Caracas

I was pleased to see that two places I would like to visit, Lagos and Kinshasa were not on the list, two places I have been avoiding. I hope the escapehere.com report is an indication that things have gotten better. As for Rio, to be on a list with Baghdad and Juarez is a real "downer."

I can attest to having encountered no difficulty during my two week visit to Rio about 10 years ago and I would recommend any to visit.

Photo: Rocinha Favela, Rio de Janiero (by author)