Houston Strategies

Superstar Cities part 2: thoughts and analysis

Continuing Superstar Cities week, today we get into my thoughts and analysis (part 1 was mostly excerpts). I'll note in advance that I can't take credit for all these thoughts/observations. Others have noted some of them before, most notably Joel Kotkin and his observations on ephemeral/boutique cities.

My first and most prominent thought is that I hate the label. Superstar City sounds like a great thing, right? Who doesn't want to be one? But they specifically define it as cities that have cut off the supply of new housing, either from lack of land, or transportation infrastructure (to new suburbs), or political resistance to growth and density. Those are not good things. For example, Portland seems well on its way towards earning the superstar label simply by drawing an urban growth boundry and restricting the new supply of market-demand housing. If Houston wanted to, it could do the same thing: go on an annexation rampage of all open land and then deny permits to develop on it. We still have quite a few high-growth industries and migration, so then we'd quickly become a "superstar." But why would we want to encourage this? A better label would be "closed", "restricted", "constrained", or "limited" cities. Then cities wouldn't be so quick to want to see themselves on the list. But, then again, this paper probably wouldn't be getting so much attention without its provocative title.

Although you might not expect it, there is definitely evidence of this model in Houston. An excerpt:

These patterns are repeated when we compare superstar towns to other towns within their metropolitan areas. “Superstar suburbs” typically have more high-income households and fewer poor ones, and experience a greater rightward shift in their income distributions and more rapid growth in their house prices when the number of high-income households in their MSAs rises. They, too, have higher price-to-rent ratios.

Can you say: Bellaire, West University, River Oaks, and the westside villages? All have run out of land and are in high demand by high-income households.

So let's explore the system of forces involved here. A city fills up. NIMBYs fight any new density, putting even more pressure on home prices. This causes skyrocketing property taxes, and the voter backlash usually guts it (see CA prop 13). With revenue constrained from residential property taxes, city governments lose the incentive to create more of it, and they especially don't want more of any housing that would actually cost them money, like for the poor (who need more services) or families (that have kids that need educating).

Now, the report talks about the poor being driven out by increasing home prices. But if you really look at their data and graphs, you'll notice something: the real displacement is the middle class. The middle class actually own homes they can cash out of (and move away) and sell to upper income families that can afford to move in. The poor mostly rent, and, as the report noted, rents stay relatively more affordable, so they can stick around. In economic theory, landlords should tear down the low-income apartment complexes and replace them with upper-income housing, but city governments, NIMBYs, and the residents themselves tend to pretty actively discourage this - and, in any case, they're not usually in neighborhoods desired by upper-income households. This meshes well with a recent Brookings study noting that middle class neighborhoods have declined substantially as a percentage in cities, while upper-income and poor neighborhoods have increased. Middle-income neighborhoods seem somewhat unstable - they tend to "tip" one direction or the other: either the wealthy move in and gentrify, or the middle class flee as it declines.

The result is that a "superstar city" ends up with a very polarized population of wealthy and poor (usually with service jobs to the rich), and almost nobody in the middle. Employers who need middle class workers leave or outsource those operations elsewhere. That leaves a sizable gap in the social mobility opportunity ladder (both jobs and home ownership). With no middle class jobs to aspire to, the poor are stuck and frustrated, and the wealthy feel guilty. You then get the blue welfare state phenomena to "warehouse" the poor in comfort and assuage rich guilt. This is common in Europe too - note the poor tenement immigrant population of Paris that rioted.

I think you can even see evidence of this in the MA and CA universal health care plans: put the burden of health care for the poor on employers. Most of the middle class employers have already left, but the remaining employers on the margin will leave. The wealthy don't care, and will bear the cost additionally in higher prices by low-end personal services where the employers are now mandated to provide health care to all employees (essentially a giant increase in the minimum wage). It actually works as long as you don't care about attracting mobile mid-level jobs and you have a wealthy population that isn't likely to leave and can absorb the burden (i.e. a close match to the definition of superstar cites, which pretty much cover MA and CA). The downside is it rips even more middle rungs out of the opportunity ladder, further locking in the poor population.

So, if you value upward social mobility and opportunity, superstar cities and employer-sponsored universal health care don't seem... well, very healthy. Thursday night in concluding part 3 we'll explore solutions to this situation (um, assuming I can come up with some between now and then...).

posted by Tory Gattis @ 10:01 PM