City growth, affordability and the decline of the middle class

The NY Times has an interesting piece today on middle class people leaving increasing expensive coastal cities (SF, NY, etc.) and going to more affordable cities in the interior of the country.

The underlying dynamic is pretty straight-forward: Without the liar’s loans that were available in 2005-6, there’s no way for middle class people with stagnant wages to afford homes / apartments in the coastal areas where prices / rents continue to increase. Rather than live marginal existences on the coasts, lots of people are choosing to move to Oklahoma City, parts of Texas, etc.

If you carry this dynamic to its logical conclusion, you end up with coastal cities that are bifurcated between very well-off people who can afford property and immigrants who are willing to tolerate difficult economic circumstances in order to fill jobs servicing the wealthy people.

To me, that sounds like a pretty awful future. I would prefer to live in a city where the population is diverse in terms of ethnicity / race and also in terms of income.

How do we ensure that middle income people can remain in coastal cities like LA? There are three broad options:

1. Impose restrictions on prices and or rents. Policies like rent control do make it easier for low and middle income people to remain in expensive areas. However, the costs of these policies are disproportionately born by two groups: Owners of the effected real estate (who are unable to get market rates for their property) and people who do not qualify for the assistance (because the rent / price restrictions act in practice as supply reductions, increasing the prices of whatever remains in the market).

2. Have government intervene to create more supply. An example would be government providing tax credits to developers to build affordable housing units. This kind of intervention works (new units are created) but it is impossible to scale. Why? Because it would be ruinously expensive for the government to create enough affordable units to make any kind of dent in market prices. (By the way, one main reason for this is that government often requires developers of affordable projects to use union labor, dramatically increasing the costs of construction.)

3. Change the zoning.

As many of you already know, I am a major proponent of #3. Why?

  • It’s costless upfront. At the stroke of a pen, city government can re-zone land from sparse, single-family to dense multi-family. Developers will immediately jump in, buy up the newly re-zoned land, and start building units. The more permissive the re-zoning, the more units you’ll get.
  • Increasing infrastructure costs can easily be offset. Yes, new apartments require more roads, water pipes, subway stations, etc. But it’s trivial to price this in to the cost of the project by extracting development fees from developers (we already do this).
  • The costs are canceled out. Yes, some people who currently live in the single family areas will bear the cost of much of the new development (they will end up with big apartment buildings on their streets). But the value of their properties will increase materially, giving them the opportunity to sell out at a huge profit, then decamp for areas more in-line with their personal preferences

Bottom line: We have a solution for the lack of affordability of our coastal cities. We just need government to be willing to do what needs to be done.