Monday, March 14, 2005

The benefits of housing affordability

A recent report ranking the highest-risk housing bubble markets has an interesting side-by-side comparison of San Diego and Houston. Both have a median income around $36K, but San Diego's median home price is $578K to Houston's $137K. This means the average household in Houston only has to spend about 22% of their income on their median-house mortgage, while in San Diego they would have to spend 90%! (if the banks would even grant such a loan) The percentage is 50% or more for many other cities in California and the Northeast.

This has got to be a huge drag on their longer-term prospects. Not only does it make labor extremely expensive for businesses, but all that income going for mortgages is not available for education, restaurants, arts, entertainment, charitable giving, or small business entrepreneurship. They may enjoy a short-term boost as people cash out their bubble homes (just like some lucky people bailed out on Internet stocks in '99), but the longer-term headwinds are stiff indeed.

What's Houston's secret to keeping housing costs reasonable? It's pretty simple really: allowing supply to grow to meet demand, including minimal regulatory interference so condo/apartment/loft/townhome densification can naturally occur where the market wants it. It also includes mobility investments (mainly freeway capacity) that keep the new housing supply within a reasonable commute of the employers.

As one professional residential real estate investor, looking for scarce housing to invest in, so colorfully noted in a recent Wall Street Journal article:
He also looks at supply, steering clear of Texas, for instance, because "they build houses like rabbits multiply."


At 10:06 PM, March 14, 2005, Anonymous Anonymous said...

The secret to keeping Houston's housing costs low in comparison to other cities has more to do with geography than most other factors. Houston can expand 50 miles in any direction from the CBD with very little interruption from natural features or major political boundaries. Land is readily available. But San Diego, for instance, is hemmed-in by the Pacific Ocean, the Mexican border, the Miramar Air Station, and various mountain ranges. New York: the Atlantic Ocean, Long Island Sound, several rivers, and three states. San Francisco: the Pacific Ocean, the bay, mountains... Housing couldn't possibly be as cheap in those cities as in Houston even when you "deflate" the housing bubble simply because land is in such limited supply.

Houston is more appropriately compared in terms of housing prices to places like Dallas, San Antonio, Orlando, and maybe Phoenix. These too are cities with relatively few geographic constraints to their growth.

Is it a drag on the economy of San Francisco if so many people are renters who might otherwise be owners in cities like Houston? Not necessarily. I have no facts to base this on, but my impression is that many of the rental units in San Francisco are houses that have been divided into apartments, and it's quite likely that many of the owners of these dwellings live in San Francisco. So the money spent for rent is retained in the local economy. How about for us homeowners who are paying mortgages? My mortgage payment does not stay in Houston, so that money leaves the local economy.

It strikes me that places like NYC, San Diego, and San Francisco do not lack restaurants, entertainment venues, arts venues, charities, small businesses, and educational opportunities. Residents in those cities are finding ways to spend their money on these things just as we do in Houston. I don't find reason to think that the future for these cities is bleak because they are more expensive than the average American city. Quite the opposite - it's indicative of how much people want to live there. And let us not forget that even in cheaper cities like Houston, times couldn't have been worse some twenty years ago no matter how inexpensive it was to be here.

I certainly enjoy the benefits of the lower cost of living in Houston, but as one might observe, sometimes it's not the lowest cost brand that beats the competitors on the supermarket shelf.

At 10:38 PM, March 14, 2005, Blogger Tory Gattis said...

A few thoughts in response:
1) Yes, they are land constrained, but they are often also "anti-supply", preventing new construction or densification in many areas.
2) As far as renters in SF, I suspect many of the owners cashed out via a low-interest home-equity loan and are now retired in Nevada or Arizona. Some of the money stays local, but I'll bet a lot of it goes east.
3) According to Joel Kotkin's historical analysis of cities, they often go into a "genteel decline" after gloriously peaking (little known fact: Rome topped most "hot cities" magazine lists right before the decline, fall, and the Dark Ages ;-). There is already some evidence of this in Boston and San Francisco.
4) Agreement that low cost doesn't win alone. There are plenty of low-cost cities languishing in the rust belt. But it's always helpful to have the economic winds at your back rather than your front...

At 9:05 AM, March 15, 2005, Anonymous Anonymous said...

Regarding point 1, I don't think I'd characterize NYC as "anti-supply". The city has witnessed an explosion of new residential construction. The city approved over 25,000 new units for construction in 2004. Entire neighborhoods are transforming (or have been transformed) thanks to the building boom.

Regarding point 3, what evidence indicates that Boston and SF are in the early stages of a prolonged period of decline?

ULI recently endorsed the prospects for NYC, SF, DC and Boston from a real estate investment perspective in their Emerging Trends in Real Estate 2005 report. They wrote that "cities with barriers to new development continue to gain favor over “hot growth” markets. New York, Washington, San Francisco, and Boston are well positioned—they feature geographic barriers, planning controls, and modest employment growth prospects. Despite having expanding populations, Dallas, Houston, and Atlanta lose standing, because of unrestrained development and poor growth management."

At 5:20 PM, March 15, 2005, Blogger Tory Gattis said...

New York is one of the better ones, although 25,000 units is a drop in the bucket for their 8m population. Houston estimated 35,000 new homes in 2004, with a metro population of 5m - and that doesn't count apts/condos.

I believe both Boston and SF have lost jobs and population in recent estimates. SF had the largest population decline of any major city in the US in 2002 - a 1.5% loss in one year.

The ULI study reinforces my point by saying those cities are great for real estate speculation because of constrained supply. It might be good for land speculators, but I don't believe it's good for economic growth or the citizens. As a parallel, if government started closing port docks or airport runways or public colleges to create scarcity, you would do pretty well as the owner of one of the remaining ones - and could charge high prices - but the city economy would be hurt.

One good way to think of high housing costs is that it's like having extremely high property taxes, but, for the most part, the money goes elsewhere rather than into local infrastructure and services the way taxes would.

Take the story of somebody buys a $200K home in SF, and 20 years later cashes out of his now $800K home and retires to Nevada, leaving the new owner with a huge mortgage. The equivalent impact, if the home value had stayed closer to $200K, would be SF multiplying his property taxes (to get the same monthly cost as an $800K mortgage) but then handing the money over to Nevada rather than investing in SF. I can't see how that can be good for SF.

At 10:24 PM, March 15, 2005, Anonymous Anonymous said...

Just to clarify about the NYC data, that's 25,000 housing units approved for just the city itself, which is about 320 square miles. That's very impressive, especially since as you pointed out there are already 8 million people in those 320 square miles.

Our figure of 35,000 new homes for the entire Houston metro area - also an impressive figure - covers a geographic area of several thousand square miles. Yes, those new homes do seem to multiply like rabbits on the Katy prairie.

I'll send that ULI report to you as a item of general interest.

At 12:35 PM, March 23, 2005, Anonymous Anonymous said...

I'm far from an expert here, but as a NYC resident (unfortunately!), I'd say that the prevailing opinion here is that NYC is "anti-supply" (at least in Manhattan). The permitting process for new construction within the city is notoriously difficult, partially the result of lobbying by existing landlords in order to purposely restrict supply, thereby maintaining the exorbitant pricing on their rental units. I don't know who around here would characterize this city as undergoing an "explosion" of construction - though as noted above, certain neighborhoods (Harlem) are seeing a disproportionate share of the building.

NYC IMHO is more typically thought of by folks here as experiencing a chronic undersupply of residential housing. I don't have any idea what the magnitude of the undersupply is (leaving aside the question of how exactly one defines "undersupply"), but I'd wager a month of my NYC rent (ouch!) that it's well over 25K units.

(see some other thoughts at


Post a Comment

<< Home