Housing Costs Reduce the Return to Education

In normal times and places house prices are kept fairly close to construction costs by the ordinary processes of supply and demand. Average house prices didn’t rise much over the entire 20th century, for example. Even today, house prices are kept close to construction costs in most of the United States. But extreme supply restrictions in a small number of important places (San Francisco, San Jose, LA, New York, Boston etc.), have driven average prices well above any seen in the entire 20th century.

Over the last several decades high productivity industries have become more geographically concentrated. As a result, a substantial share of the productivity gains from technology, bio-tech and finance have gone not to producers but to non-productive landowners. High returns to land have meant lower returns to other factors of production.

The return to education, for example, has increased in the United States but it’s less well appreciated that in order to earn high wages college educated workers must increasingly live in expensive cities. One consequence is that the net college wage premium is not as large as it appears and inequality has been over-estimated. Remarkably Enrico Moretti (2013) estimates that 25% of the increase in the college wage premium between 1980 and 2000 was absorbed by higher housing costs. Moreover, since the big increases in housing costs have come after 2000, it’s very likely that an even larger share of the college wage premium today is being eaten by housing. High housing costs don’t simply redistribute wealth from workers to landowners. High housing costs reduce the return to education reducing the incentive to invest in education. Thus higher housing costs have reduced human capital and the number of skilled workers with potentially significant effects on growth.

Housing is eating the world.


On the other hand, rising housing prices has been the stimulus that keeps on giving, as the Fed has become increasingly reliant on housing prices to stimulate or deflate the economy (mostly as the result of the wealth effect) because Fed policy doesn't have the effect on business investment as it once did. I too believe that housing is a waste of resources, but unless an until the Fed figures out how to stimulate or deflate other sectors (i.e., investment in productive capital), we are stuck with high housing prices.

What a bunch of nonsense. It's an issue of artificially constrained supply and has essentially nothing to do with wacky ideas about the Fed being "reliant on housing prices."

Because of the disdain that techy elites have for the midwest flyover country. Too bad. They could improve their bottom line by relocating.

Not really, because their high incomes are dependent on living where the action is. For all the talk of the internet allowing you to work anywhere, in reality your career depends on living in and swimming in the tech ecosystem every day.

However, making your living in the tech center then retiring cheap to flyover land is the smart play.

I’m a techie working in the Bay Area. I’m also not white, and I’m gay. The midwest and flyover country treats people like me terribly, they’re pushing away talent to the places that accept them. It’s no coincidence that San Francisco and New York attract the most creative and intelligent people in the world, and the red states stagnate. Act welcoming to immigrants, LGBT people, and people with a college education, and it’ll go a long way.

I am also a techie working in the Bay Area. I am an investor at a notable growth fund. I am white, and I choose to subordinate my sexual preference (which is to sleep with many women) in service of society, God, and my family (i.e. my wife). I am from Iowa. Your comment is ridiculous. No one treats you badly in "the midwest." You aren't a victim. Many hackers who live in the midwest are better than you. Many farmers, who cannot code and have no advanced degree, possess an intelligence superior to yours. You are ridiculous. Go away with your Tina Fey-inspired monocultural judgment.

Your comment is illogical. You don't know if the person you're denigrating is smarter than you. You don't know his or her experience either. All you (we) know about the person is his or her location, industry and education level probably being at least a bachelor's. However, by trying to exert dominance over that person based only on scant data, you reveal yourself to not too bright and very racist, which strongly correlate (lower IQ stongly correlates to racist views). As for your professed religious views, they certainly aren't Christian and you'd know that if you ever read the New Testament, which was called new for an important reason: the sermon on the mount and its other teachings are radically different from the unChristian brand of religion common in the Old Testament and common in the midewest and deep south. In short, you made a fool of yourself and sully the word Christian. However, I too make this mistake by assuming you think of yourself as a Christian since only refered to "God." You could Jewish, Muslim or Zoroastrian. My apologies.

"The midwest and flyover country treats people like me terribly"

Are you speaking from actual experience?

'If not for massive asset price inflation, the Fed would be forced to deal with massive consumer price inflation.'

Non sequitur. The largest component of cpi inflation is housing costs (42%), drive down rental inflation you drive down it's twin in mortgage repayment costs and by proxy housing price inflation will fall even though that is not included in cpi.
When Denmark attacked speculation with an increase in lvt rates from 1.2% to 2.6% back in 1957, as land costs fell headline inflation fell from 5% to 1%, IR's were lowered accordingly and the economy otherwise boomed until the policy was reversed under pressure from the property lobbyists.
The use of Detroit as example is disingenuous, the area has like many been damaged by land speculation and reached a point of negative land value, and is still burdened by the same dead weight costs of taxation upon productivity. Yet speculators apparently still have bought up some 20% of the land, hoping no doubt for some public stimulus or rezoning to create windfall capital gains.

The Fed doesn't 'stimulate housing'. It primarily lowers the short term interest rate. What happens after that is up to the market. There is no law that says lower short term rates must show up as mortgage companies making bigger loans. Lower rates could just as easily show up in having Amazon issue more bonds to build server farms or banks making 'small business loans' to individuals buying cars to be uber/lyft drivers.

After my latest arson arrest, I tried to tell that to the judge: I don't set fires; I just provide some gasoline and a match. The rest is up to nature.

So in 2008 home prices went way up? After all, interest rates went way down!

lol. Thta's just silly.

Boonton get back to me when you figure out why that's wrong.

This is not my original idea (have I ever had an original idea?). No, it's the position of many highly respected economists. The hostile reaction of the readers is proof of the veracity of the idea. Negative interest rates didn't motivate business to invest in productive capital. A trillion dollar tax cut barely registered with business as to motivate business to invest in productive capital. Housing prices, however, are sensitive to interest rates; and housing prices that go up stimulate owners to spend (the wealth effect). Tabarrok prefers his story: that state and local government is responsible for rising prices through zoning and building regulations. It doesn't occur to Tabarrok and Cowen that order and stability (in this case in housing) are a good thing, providing the confidence for Americans to take risks and invest. They prefer disruption, scaring the poor bastards into behaving themselves and their betters.

So are you an MMTer?

"The rest of the world and professional economists disagree with me. I take that as proof of my correctness!"

It scares me to say it but rayward is right and brief exposition is pretty decent.

Interest rates determine how much people can borrow, which in a competitive housing market sets the price of housing. If interest rates rise a point, housing prices drop accordingly. And visa versa.

This on top of other market considerations.

He's right in general, in that interest rates have an influence on overall housing prices.

What he doesn't pay attention to is why interest rates would influence houses prices to become extremely high only in certain cities, the ones with zoning and building regulations, but not other similar sized and open-land-available cities without zoning and building regulations. They wouldn't. The interest rates on mortgages are the same in Phoenix and Austin as they are in SF and NYC.

In other words, it's not the interest rates making the difference. The increase in prices are all in the high regulation limiting supply cities. That's not a coincidence.

Why is it that rising house prices stimulate owners to spend? I suspect that your "wealth effect" is just a side effect of pushing lower income brackets out of neighborhoods, which just shifts wealth but does not actually increase the propensity to spend. After all, why would anyone spend more when their rent increases (and they therefor have less disposable income)?

Not only that... while Peter Thiel is disappointed that we don't have flying cars, I'm saddened that I'll never get to live in the kinds of houses imagined in Popular Science/Mechanics when I was a kid.

Maybe those designs would not have happened anyway, but in our regulatory environment, anything new and interesting involving housing has been outlawed.

I'm guessing that in West Virginia, to name one specific state, that it is not the (virtually non-existent to lax) regulatory environment that is the hurdle to anything new and interesting involving housing.

"Virtually non-existent"--meaning they have a boatload of regulations, but maybe a little bit less than some other states.

Actually, I know they have no zoning (at least the last time I was in West Virginia), so let me see about other things.

Yep, if this site is to be trusted, depending on where you live in West Virginia, there is no building code enforcement at all (fire codes do not seem to be left up to local jurisdictions, though) - 'West Virginia, through the WV Fire Commission, has the regulatory authority to adopt the state’s building and fire codes. The Commission has adopted statewide the 2009 editions of IBC, IRC, IMC, IFGC, IPC, IPMC and IEBC for any jurisdiction that chooses to enforce building codes as well as the ’03 IECC.The State Fire Commission passed a resolution in April of 2008 to encourage all counties and municipalities to utilize the 2006 I‐Codes.' https://permitplace.com/permitting-tools/permit-directory/west-virginia/west-virginia-permit-building-code-and-licensing-information That information may be a couple of years out of date, but no, West Virginia does not necessarily have a boatload of regulations, and the absence of any building code enforcement depending on jurisdiction does not sound like 'maybe a little bit less than some other states'.

Fire codes haven't changes nearly as much as electrical, environmental and water codes have changed.

And it looks like West Virginia is following the nation in that regards:

"Mar 28, 2016

On March 14, 2016 the State of West Virginia legislature voted to adopt the new building code rules package with an effective date of July 1, 2016."


What is interesting, and plays into my memories of people who owned property in West Virginia, is not that the state lacks a state building code (it has one), but that enforcement of the building code seems to be completely voluntary on the part of local jurisdictions, with the state playing no role in enforcement.

In other words, the state has a set of rules which, depending on where you live, can be completely ignored by someone building a dwelling place if they so wish.

How much building is going on in West Virginia?

Well, to the extent that people aren't building in West Virginia, it is not because of excessive regulatory burdens.

"Maybe those designs would not have happened anyway, but in our regulatory environment, anything new and interesting involving housing has been outlawed."

Solar powered houses are outlawed in California?

Or do you remember PopSci as portraying energy wasting houses, or coal powered houses?

I remember solar passive and solar heating houses. It turns out that solar power plus ground source heat pumps are more cost effective. Drill baby drill those energy sinking/sourcing wells! And I recall PopSci articles on heat pumps back when they were only viable in warm climates.

The majority of stuff in PopSci was based on marketing material for grossly undercapitalized corporations, or rent seeking big corporations unwilling to invest in markets for the long term, ie, 5% ROIC over a span of 20 years on assets with 30-50 year lifetimes. Instead, investments are in gas and oil cheap heating systems that are obsolete a decade after install. After all, 99% of housing builders don't care about costs of housing past year one, because most are small guys unwilling or unable to invest in marketing.

I would note none of the articles on flying cars mentioned the great benefits of being awakened at all hours of the night by neighbors coming home at 2am and others heading to work at 5am.

Read Idiosyncratic Whisk, the blog.

Property zoning is a much, much bigger structural impediment than Trump tariffs.

Maybe by a factor of 100 to 1. Probably more.

So who benefits from property zoning? Why no hue and outcry?

Property owners and lenders, that is why.

The joke: There are no atheists in foxholes, and no libertarians when neighborhood property zoning is under review.

Probably need a Supreme Court ruling reversing the 1926 split decision upholding local zoning.

Barring that, large federal inducements (bribes to local government wh could pay-off local property owners) to unzone property, based upon density.

The rural Red states will block it, but worth a try.

Kudos to Alex T. This is the big issue, or should be.

By comparison, trade issues are for snivelers.

Maybe some day we can decriminalize push-cart vending too.

If you realized the libertarian vision of no zoning anywhere, the most expensive properties would still be the ones without lead smelters or abbatoirs next door.

Also, isn't housing cheaper in Red states than Blue states despite all those stupid Red state rubes and their obsession with enacting complex, recondite zoning regulations? Red states tend to be lower tax and right-to-work as well.

It's interesting how much libertarian debate these days seems to drift toward having centralized, even supra-national authorities override local rule. It's like we should empower consumer choice, except consumer choice on local government!

Don't red states have less zoning/land-use restrictions?

Yes, they do. Texas has almost no zoning except for flood control.

Note that Texas is now passing California in high Tech production, while California is frozen with zoning and NIMBYism.

Yea, ummm, no. Texas cities have plenty of zoning, HOAs, deed restrictions, etc. Houston, which famously has very few zoning restrictions, has just defacto replaced them with far more restrictive HOAs and deed restrictions. Granted, almost none as bad as CA though.

Plano, very conservative area, zoning code https://www.plano.gov/1259/Zoning-Ordinance

Almost every subdivision will also have a far more detailed set of deed restrictions on top of these.

"Property zoning is a much, much bigger structural impediment than Trump tariffs"

Is it zoning that prevents 50 single family houses with front and back yards per acre instead of the norm of 5 single family houses per acre?

Isn't the fact that someone already owns the land and a house on the land the biggest impediment to you building an apartment on the block the house is on?

There have been numerous cases of individual homeowners greatly hindering developers building shopping centers, casinos, and mixed housing and commercial. Often attempts are made to have eminent domain force owners to sell. In a number of cases, offers in excess of a million dollars was offered, and once the builder built around the property, the land was sold for cheap, after the owner died, often with no heirs.

Kelo is an example of individuals throwing up obstacles to development by claiming their property ownership trumps the interests of developers of big projects. The delays caused by Kelo et al likely pushed the project past the window of viability, killing the majority of the project, and then making the long term viability of the enterprise untenable.

So, do you argue for weak property rights for individuals allowing for big corporations to force individuals off their land?

As housing is an area game, it is zoning that is preventing 3-D living where an area is created by building up at a lower cost than the present housing cost in SF.

Probably need a Supreme Court ruling reversing the 1926 split decision upholding local zoning.

I do not see why the Feds cannot force a presumption to allow any residential building that increases density under the commerce clause. People have to live somewhere.

NIMBYism has indeed crippled the ability of markets (in the form of developers) to provide a reasonably elastic supply response to increased demand for housing in those boomtowns.

But I'm not sure that doing away with zoning will solve the problem.

In lieue of zoning, homeowners will form private homeowners' association, gated communities, and other private multi-home developments.

And keep on doing the same NIMBYism.

US real estate practice and Federal bank regulations call for employing three appraisal (comparable sales, construction costs, income) methods each appraisal. Generally, for single-family homes, the income method isn't applied.

When the comp sales approach estimate of value exceeds construction costs, there is a problem. Why (economics) would one pay more for a residence when one could buy a parcel and build one for less? Location and low supply (my village in Nassau County has no buildable lots) of undeveloped parcels is one reason.

Still, this is a red flag. Need to be wary of another housing bubble.

Regarding comp sales and the now 10-year-old housing crisis, soaring comp sales were employed in lending decision without regard to the inflated natures of the comp sales. Appraisal analyses need to emphasize the property's and comps' sales histories.

I agree. Price is what you pay, Value is what you get.

"no libertarians when neighborhood property zoning is under review. "

While a libertarion would prefer no zoning anywhere, and no land use restrictions, if one buys land where the lot and neighbor lots all have the restriction that each house requires X square feet of land, changing that after the fact is in effect a breach of contract. Especially when only lots owned by connected developers gets upzoned.

Yep. Not ideal, but you have to live with what's there. If I buy in with an understanding, it's a taking when that understanding is breached.

Why landowners/landlords are described as "non-productive"?

Imagine I want to take a job offer starting next month in a new city. I need a place to live and my options are: build, buy or rent.

Today, very few people know how, have the physical strength and spare time to build a house. Due to the division of labor, the people who build houses have specialized in building houses. Self-building is quite probably a waste of resources. Buy? High upfront costs and lack of flexibility to move in the future. Rent? You can move 1 day before the job starts because everything is working already (water, electricity, cooling/heating, even furniture) and move out at the end of contract. Flexibility and minimal upfront costs.

Landlords may not win a popularity contest, but they develop and sustain the infrastructure that allows the rest of us to specialize in other areas and fulfill our potential.

Ps. with price-to-rent ratios around 40 in SF i don't think the current landlords really winning. You have to start to think why current landlords decide to "lose". Either they are really risk averse or real estate is a nice and safe place to invest illegal income.

Obviously you are not familiar with the works of Adam Smith. You should try reading a book once in a while (or at least skimming like Tyler) you might learn something.

Adam Smith talked about agricultural land and he was quite dogmatic. Even in his time land was not valuable only because of what nature/God created. Humans already invested capital on irrigation systems (at least 6000 years old), moving dirt to make plots more horizontal (terraces ~3000 years old), walls for cattle, removing rocks to make plowing easier (5000 years old). When crop rotation was discovered, you could rent land ready to produce food instead of waiting for nitrogen to be naturally replenished.

If Adam Smith only saw "land" and not the labor and capital invested on it, that's his ignorance, not mine.

And that's only for 18th century agricultural land. Housing today can be a furnished apartment noise insulation, fire protection, running water, electricity and a parking place.

Much of the land in Scotland in Smith's time had been made useful only by drainage works. I must say I'm surprised by your suggestion that Smith hadn't absorbed this fact. Are you sure?

Jesus Christ read a book you fucking retard.

Landowners and landlords generally don't pay for the infrastructure and capital investments around their property that make their property valuable.

"Landowners and landlords generally don't pay for the infrastructure and capital investments around their property that make their property valuable."

Because current property taxes go straight to the teacher and police retirement funds?

Right. Who needs less mass stupidity and more crime?

In principle you are correct, and this works well for a lot of cities with low restrictions. But the evidence for those cities that are mentioned here as problematic clearly points into the other direction.

As Tyler himself writes, housing and building costs should normally rise and fall together, and in this case, you have this healthy 'deal' you describe between landlords and tenants. Yes, landlords build more efficiently, but that's more in the realm of 20%-10% cheaper, so even slightly too high rents and tenants will just build themselves. Altogether, in a healthy market, the housing costs are strongly constrained.

This means that, if you see them diverging a lot, something is going really wrong. And if you look closely at the cities with extremely high rents compared to building costs, it's almost always zoning laws that are the clear culprit.

Also, as an aside: In my experience, in smaller cities where the rents are reasonable, there is very little division between landlords and tenants. It's mainly in the big cities, where you have a lot of people who normally would like to build something themselves, or poor people paying way more than what seems appropriate, where you have this really bad opinions about landlords. And I'm not sure they are wrong. Hell, even the service is much, much worse in these cities because the landlords just know that you don't really have many options.

Because most of the value of a rental property is not the building or infrastructure, but the land value or location value or site value, which is not created by the landowner or landlord. Every house is situated in a specific spatial location, which is perfectly inelastic in supply. The landowner/landlord has a monopoly over this spatial location, and this monopoly is where the landlord/landowner's derives his return.

In New York, everybody wants to live on the same island, so yeah, it's expensive. Same with Hong Kong, which appears to have been willing to let developers build vertically as high as they want.

According to Zillow, the median home price in Newark, only 12 linear miles from Manhattan, is around $233,000, so there would seem to be affordable housing within the constraints of the island, isthmuses, and peninsulas on which New York City is located. Hackensack NJ is within 10 miles, and the median home price is $270,000.

There's plenty of cheap land for development all over the continental US. The fact that everybody is bidding up prices for a finite set of ZIP codes can't be blamed on the municipal governments of San Francisco, NYC, Boston, etc. Again, all of them seem to have allowed plenty of vertical development.

The return to education, for example, has increased in the United States but it’s less well appreciated that in order to earn high wages college educated workers must increasingly live in expensive cities.

This is what we call "running in place," or "treading water." I assume somewhere Alex has written about the externalities in the market for college education.

According to Zillow, the median home price in Newark, only 12 linear miles from Manhattan, is around $233,000, so there would seem to be affordable housing within the constraints of the island, isthmuses, and peninsulas on which New York City is located. Hackensack NJ is within 10 miles, and the median home price is $270,000.

One problem here is that when you start seeing real estate in terms of city blocks, 10 miles might as well be 100. Living in Hackensack to try to get the best of Manhattan while enjoying lower property costs means you'll need a car and need to devote an hour each day to get to Manhattan.

Transportation matters here a lot. Hoboken NJ is almost an extension of Manhattan. You can walk to the Path train and be in Manhattan in about 10 minutes. Median home value there is about $770K.

Right, but only a finite number of people can live within a bus ride to their office at Goldman Sachs or Weiss Rifkind, even if you theoretically carve up Manhattan into large, efficient blocks of residential apartments, 30 stories on each side. So naturally, the people with graduate degrees working 12-hour days are going to bid up the closer properties. If they don't like it, again, there's plenty of cheap land with Internet connections and reliable infrastructure all over the US.

A quarter of a million dollars is "affordable"? Only with the prospect of ever-increasing real estate prices, since practically no one pays cash for a house and the property it sits on.

Of that "affordable" $233,000 for a house in NJ, how much of that is for materials and labor? Construction productivity has boomed but it's not reflected in housing prices.

For a starting associate at Big Law or Big Bank it's a layup. Again they're the ones bidding for proximity and safe places to socialize with other people like them.

Have you ever been to Newark? You would be better off in Iraq, violent crime and car jacking wise.

Sections are changing in Newark. You can now spend $300K to get two bedrooms


How's Passaic doing?

The college wage premium is not an illusion. But, more of the rent from it is being collected by the pre-existing property owners in big cities. My own take is that as long as there are run down city properties to gentrify, this is not the worst equilibrium.

This. Many of our policymakers want to see housing prices appreciate forever. Another way of framing this post would be, “Education Costs Increase the Return to Housing.”

Do you think the posts argument is supported by the facts generally.

Over the period 2007 to 2014 the House Price Index has been flat. https://fred.stlouisfed.org/series/CSUSHPINSA

Higher healthcare costs and health insurance premiums in the meantime have reduced the return to the educated and uneducated alike.

Which deserves more attention.

As for housing prices in certain cities, when employers will not be able to attract employees to an area, they will diversify their work locations, or will buy land and build their own communities around their operations and become the monopsonistic landlord or land owner.

Mining companies got out of the "company town" business long ago.

Well, Chuck, perhaps you do not know about Google and Facebook's residential projects.


"Facebook is one of the few companies in recent years to continue the legacy of the traditional company town, where the corporation master-plans a new community for its employees to work and live in.

By 2021, Facebook will complete the first phase of Willow Park, a corporate campus that will include 1,500 housing units, retail, a hotel, and grassy plazas in Menlo Park, California.

According to The Times, the development will be between two majority-Hispanic communities, Belle Haven and the city of East Palo Alto. Out of the 1,500 units, Facebook has agreed with the city to offer 225 at below-market rates, but the company's employees will live in most of the housing."


Relatedly, Google is spending $30 million and partnering with the modular-home startup Factory OS to build 300 units of pre-fab housing for employees in Mountain View, California. ... Construction will happen at the Moffett Federal Airfield, a site the company has leased from the government since 2014. The plan is being pitched as a temporary solution to the area's affordable housing crisis."

The story about old and new company towns is here: https://www.businessinsider.com/company-town-history-facebook-2017-9#relatedly-googleis-spending-30-million-and-partnering-with-the-modular-home-startup-factory-os-to-build-300-units-of-pre-fab-housing-for-employees-in-mountain-view-california-13

when employers will not be able to attract employees to an area

Is there some proof that Facebook and Google, surely representatives of modern American business, after all lettuce, plywood and pool cues are all produced by very similar companies, have a problem attracting employees? Since there are many more companies in that area that aren't mentioned daily in the business press, it's entirely possible that they have a problem attracting new employees, too. Are they also building company towns?

Google is spending $30 million and partnering with the modular-home startup Factory OS to build 300 units of pre-fab housing for employees in Mountain View, California.

That's $100,000 per unit. The median price of a home in Mountain View, CA is $1,936,400. These units must be anomalies, in several ways, even disregarding the price of the real estate. Probably no one but Google can make a deal like this.

That said, it still supports the claim that company towns have not disappeared, and in fact may be a part of the future.

Since neither of these company towns exists at this moment, they could not have disappeared. They are still in the planning stages and those plans could be changed, so, in fact, they must be part of the future, if, indeed, the plans are completed.

Chuck, Thank you for agreeing with me when I said:

employers "will buy land and build their own communities around their operations and become the monopsonistic landlord or land owner."

While it may be important to you that people agree with you when you attempt to predict the future, that's not what's happening here.

Chuck, Read again. It is not a prediction of the future if Google and Facebook ARE CURRENTLY doing it.

Chuck, you seem you just want to be disagreeable in the light of facts.

All of this is visible to readers online, whether you like it or not. Facts are Facts.

It would appear that a major tech company that wanted to relocate to an area with lower housing costs could gain a competitive advantage.

Or those employees are paying protection money to live in socially and racially isolated communities. The undesirables or deplorables are priced out of their enclaves. Plus they may gain job mobility and greater chances at new opportunities. Those increased opportunities come at a cost. People are not irrationally spending on housing, they are making choices. Many see opportunities to become very rich but must pay entry to an expensive community. New Yorkers pay big money to live in communities that encourage the informal contacts that proximity to the “right” people allows.

Ford is moving a substantial number of R&D jobs to the Corktown area of Detroit. Perhaps the oldest section of Detroit. Will potential employees see that as a plus or minus?

New Jersey has housing issues because so many communities are undesirable. Chicago, Cleveland, Memphis, St, Louis, Baltimore, etc are very affordable unless you are looking for a safe community with good schools.

Bad policies have destroyed many communities. Especially our cities. People have responded by creating economic enclaves where they have greater control. All the Social Democrats can scream about attacking the rich but the rich are building fortified communities to protect them from those policies. While paying lip service to a few liberal platitudes.

It's like the affluent realize that people make places, so they spend a lot of money to live around other wealthy, intelligent people like them. Among the first things Mark Zuckerberg did after acquiring wealth was buy four houses around himself and fence off 900+ acres on an island in the Pacific. I think the Gates family spread is pretty low-density as well.

That's Alex's point. The people, in this case highly educated workers who pay rent, make the places valuable, not the affluent landlords and landowners. There is a tremendous redistribution of wealth from the people who actually make the places valuable to landowners.

This is Econ 101. Young, affluent people pay a premium to be near their workplace around other young, affluent people. Restricted supply is part of the value. If just anybody could move in, then young, affluent people would not live there.

The notion that a good neighborhood on Manhattan Island or the San Francisco Peninsula would be affordable if only we could build 30, nay, 100! stories a side is nonsense. If anybody can afford to live in a there, then anybody will, and the people with enough money not to be the Just Anybodies will move elsewhere. Again, there is plenty of cheap land in the US with much lower regulation than the coastal cities.

You're citing a simple supply and demand model from "Econ 101" and then contradicting yourself by suggesting that increased supply would not lower rents.

At any rate, you didn't seem to understand my original comment, which is that the value that accrues to landowners derives from other people, in this case highly educated young workers, not from anything the landowners do or produce themselves. Thus there is a redistribution of wealth from the producers to the landowners. The people that produce the value aren't being compensated. The landowners are eating it up. You either don't understand this point, or you think that people that produce the value shouldn't get what they produce and that the value should be eaten up by rent seekers.

You don't need to build more to lower rents; you can use land value taxation to lower rents and incentivize owner occupied residency.

Developers should pay affluent, educated young people to live in their apartments and condos! It's the Tenant Theory of Value!

Still Econ 101. If the owners could not capture profits from the sale of housing, then there wouldn't be any housing.

Again, thought experiment: remove all restrictions on development and what do you think happens?

Who said anything about developers paying people to live in their buildings? Land value taxation taxes landowners on the unimproved value of land. It doesn't tax buildings or improvements to real estate on the land. Developers build buildings.

If landowners cannot capture the rents as absentee landlords, then the land goes to owners who occupy the land or who can use the land profitably by building buildings on it and using them.

I don't understand what your point is. Do you think everything but land like incomes, sales, capital gains, etc. should be taxed to pay for the benefits that accrue to land?

So basically, we tax people more for selfishly having a single-family dwelling instead of a multi-story apartment. Or having a multi-story apartment when they could just have a giant solar and windmill array.

Land value taxation taxes land value, not the dwellings or structures on the land.

I suppose we are about to get a test case on the "locate a headquarters in area with cheaper housing" with Amazon HQ2.

You have lots of cities in the top 20 list that have reasonably affordable housing and several that don't.

Seems to me like there is a sweet spot in cities like Raleigh, Austin, Nashville, Columbus, Pittsburgh, Dallas, etc that allow for reasonably high salaries and along with much cheaper cost of living.

Median family income in Wake Co. NC (Raleigh) is 83k. In San Francisco Co. it is 90k. https://en.wikipedia.org/wiki/List_of_United_States_counties_by_per_capita_income

A SHOUT OUT to Marginal Revolution for exposing the burden on the working poor who live in communities with college educated professionals who drive up the costs of housing.

"It’s abundantly clear that in today’s economy, the ability to attract and mobilize highly educated people—so-called human capital—is the key factor in the the wealth of nations as well of that of cities. But the driving force of talent in economic growth also contributes to our worsening divides. While metropolitan areas with more educated people have higher levels of income, they also have higher housing costs. And the burden of those costs falls hardest on the less educated."

First, the good news: Having more college graduates in a metro means higher wages for everyone. A 1 percent increase in the share of college graduates brings a 1.4 percent increase in wages across the board, even after controlling for sorting—that is, an individual’s choice to move to an area with lower rents or higher paying jobs, or because of other factors.

But these wages gains accrue disproportionately to college grads. A 1 percent increase in the share of college graduates leads to a 1.7 percent increase in hourly earnings for the same group. Meanwhile, those with a high school degree or less see an increase of less than 0.7 percent.

Now the bad news: The increase in wages associated with college grads tends to translate into higher housing costs. Although college grads tend to earn more than enough to cover these costs, less advantaged, less educated groups end up spending a far greater share of their income on housing."

Here's the article with links to papers: https://www.citylab.com/equity/2018/05/how-college-grads-drive-up-urban-rents/559874/

I wonder what the relative influence is in choosing a city to live in: career versus lifestyle. These tech hubs seem to tend to locate in places people want to live in.

In the meantime, contemplate this: https://www.youtube.com/watch?v=bHs_o8qbND0

"... the ordinary process of supply and demand..." *SNORT* *CHOKE* [sound of coffee spewing onto keyboard]

Note to file: supply and demand is dead (if it ever lived).

Artificially low rates, government loan guarantees, major tax preferences... Jeebus H Criminy, homes stopped being homes and started being investments ages ago.

"High housing costs reduce the return to education ...": that's a point that had not occurred to me, and I think it's well made.

"... reducing the incentive to invest in education": logically I suppose that's true as long as the would-be educatees know about it - but is it a dominant effect? I'd guess (on no evidence at all) that it isn't, that the really big deal is the noxious increase in fees for higher education.

Normal processes of competition might be able to deal with the housing problem - e.g. tech industries might begin to flourish elsewhere - but it may be very hard to budge the educational oligarchs by competition.

By the by, why doesn't someone buy an ocean liner/cruise ship and moor it in San Francisco Bay as a floating apartment complex?

Or why don't tech giants build massive floating work/housing complexes, and moor those 200 miles off-shore? With regular seaplane/helicopter shuttles back to the mainland for the occasional shore leave?

Might be a good re-purpose for a mothballed nuclear aircraft carrier.

That explains why: "8. “By 2016, watching Love It or List It and Property Brothers, both HGTV shows, were the most indicative of being educated.” [TC: yikes!]" https://marginalrevolution.com/marginalrevolution/2018/07/still-coherent-culture-united-states.html

Many of the rich make their money through real-estate.

I would put a giant caveat on the HGTV stuff. You really have to either be in business as a house flipper or else be very good at DIYing stuff to make money that way. Home renovation markets are pretty efficient. My experience buying a home, in Pittsburgh no less, is that anything that's been sitting on the market is either overpriced or such a shithole that even investors won't touch it. So you really have to know what to look for in a house if you plan on renovating it. And then you really need to know how to renovate it yourself, because the contractors you hire are going to price that renovation close to what the market value is going to be. Or else really know how to shop around and price contractors. In other words, you really have to know the market and be able to either do it yourself or accurately price what a particular renovation/remodel is worth and how to select a contractor who will do it right.

And that's kind of more than you can do with a full time job unless you make it your full-time hobby outside of work.

So I would not advise anyone in today's housing market to consider buying a fixer upper and remodeling it unless they really know what they're doing. You're either going to make a mistake and buy a money pit, or the gains will be captured by contractors.

"...and how to select a contractor who will do it right."

You have to assume the role of the general contractor and handle the sub-contracting yourself. The general contractor is going to want 20% of the money. Which is going to be a pretty large chunk of your actual profit.

However, general contracting is skilled work. You have to know what a reasonable price looks like, which subcontractors are reliable and worth their cost, how to get the home efficiently past inspection in that area, and have the ability to keep everything moving in a timely manner.

"Many of the rich make their money through real-estate."

Indeed. It offers geographic diversity, which reduces barriers to entry; it is massively subsidized and backstopped by the government; investors enjoy major tax preferences; and it rewards massive debt leverage.

And it is very forgiving of failure. Anecdotally, I cannot think of anyone significant who got slaughtered in real estate and didn't bounce right back.

Same is even true of stocks....the average drawdown of US stocks is ten years, meaning if you buy at the peak, you have to wait on average ten years to recoup your money even if the stocks drop. And that includes the Great Depression and Great Recession. And stocks (diversified) outperform real estate handily.

Are there comparable-scale stock investment equivalents for government-guaranteed loans, capital gains exclusions, and 1031s?

Housing costs can be thought of as a kind of intergenerational wealth transfer. If you invested in a home in San Francisco 30 years ago, you can sell it today, and realize perhaps millions of dollars in gains. those gains are being paid today by the young people entering the workforce.

On the plus side, supposing housing holds it's value, then the urrent workers who are putting their money into those houses are still acquiring a valuable piece of real estate, and their getting paid more due to the cost of living, the extra pay is going into equity in a home which can be eventually sold and turned into cash, assuming the worker isn't roped into a balloon mortgage or something where the money just ends up being spent on interest and taxes. If they can build equity in that expensive home, they will eventually get some of that pay back if housing prices stay high.

They're. It's monday.

"Housing costs can be thought of as a kind of intergenerational wealth transfer"

Yes, but with a Lottery aspect. Some people got rich, purely on living in an area that would appreciate much faster than other areas. Was it better to invest in 1990's real estate in LA or Chicago? In hindsight (despite the rioting of the 90's), many LA house owners made tremendous fortunes and Chicago house owners did not.

" If they can build equity in that expensive home, they will eventually get some of that pay back if housing prices stay high."

I think this ignores the lottery aspect. Some of the markets that are extremely high now will, for unforeseeable reasons, fail to perform. It's quite likely at least a few will return to the long term average for the country. This will represent a devastating loss for those young buyers.

I lived in Malibu for 14 years. You have to have five acres there (not at the beach, but in the mountains.) Also the Coastal commission fiercely regulates all development. It's absolutely socialized commie style government. And you know what? It's insanely great. Because it's quiet and uncrowded and you don't have neighbors up your ass. Is it capitalism, raw and unfettered? Fuck no. As a Republican it offended me, I guess. But I fucking LOVED it.

Gated golf-style housing communities INEVITABLY impose ridiculously strict development control. To which many Republicans voluntarily and eagerly subscribe as home buyers. (at least until they want to remodel their own place).

The key: "voluntarily"

HOAs are precisely the same as democratic governments in structure and purpose, except with less democracy

You mean, except for the voluntary part?

This is a very interesting thing:

Over the last several decades high productivity industries have become more geographically concentrated.

Why and how could that be changed?

Actually, I'd like to see the evidence of that. Starting with the definition of productivity.

Pecuniary externality. Yawn.

Henry George already solved this problem more than a hundred years ago. Implement a single tax on land to replace income taxes. The returns to education and human capital would skyrocket. This regime would actually incentivize human capital formation and development.

Nobody wants to think about Henry George anymore.

Do you mean the man, or his ideas?

Good piece. Could have short synopsis at start, to wit: inflexible housing supply plus economic geography means landlords in productivity clusters get most of the surplus. As a further factor, I'd add elite job-driven immigration, since immigrants on visas (workers and students) will accept far worse housing costs than natives. Facebook and India-based firms keep pinging me about jobs in Silicon Valley, I assume so my location rejections can be added to their H1-B visa applications.

What if the highly-educated, highly-compensated were to invest all their money in housing in hot markets, possibly with a large chunk of that being from the purchase of their primary residence? Rising values should make that investment highly profitable.

Good topic. Bad conclusion.

>Housing is eating the world.

No, it is eating a handful of deep-blue cities, who frankly deserve it.

Most of the "world" is doing just fine thank you.

Those cities are doing pretty well too, or the demand to live there wouldn't be so high.

If the rest of the 'world' is doing just fine why are you mopes so angry about everything?

'zactly, they can't seem to decide if liberalism is omnipotent omnipresent and ascendant, or marginal decrepit and isolated to a few extreme enclaves

And they have a hard time articulating the definition of doing well.


Because the deep-Blue cities are trying to turn everywhere into deep-Blue.

Unlike red state folks, who are like totally live and let live with their beliefs and values.

Fair point. Maybe that's what separate countries are for. I don't see the urban majorities putting up with the Constitution's counter-majoritarian measures forever.

Housing markets could learn from the PC business. The interfaces (mechanical and electrical) between components are standardized, and things just fit together.

Someone of average mechanical skills can easily build his own computer. Why not build his own house? There is little interest in standardization, because most housing construction seems to follow a cost+ pricing model.

The benefits of standardization of components, not just building code would be tremendous in terms of consumer surplus.

The other option would be the establishment of charter cities, without the old baggage of established cities and their enormous unfunded pension liabilities. Assume an enormous farm with water rights could be bought outright. Discontinue the almond production that only makes sense using the below market water rights, and install a water purification plant, and begin the new city. Now all those yuppie things like light rail and bike lanes can be designed together with the streets, instead of being used as a tool to destroy traffic capacity in traditional cities. Also, the cost of physically separated bike lanes would be much less than retrofitting into an existing city.

But who would want to live there, and commute for miles to where the jobs are?

Jobs are the Catch-22 for starting a new town from scratch, and the fact that lots of desirable geographic locations already has cities.

In terms of jobs, let Google and other contenders in the self driving car market put their money where their mouths are. A new town could be designed to be friendly to self driving cars, as a bargain, for making jobs available, they get a laboratory and a showcase for self driving cars. Also, if costs can be made lower, they might not have to pay Silicon Valley level salaries. This might be wacky, but not as wacky as sea-steading.

PS, I am a bigger fan of a grid of ski-lift style gondolas than self driving cars for roads.


High rents have nothing to do with physical material and building costs. PCs and houses can be mass produced. A particular spatial location cannot be. A landowner has a monopoly over a particular spatial location. A PC owner does not have a monopoly on anything. The PC factory can spit out millions of new PCs.

This is why rents become high. Land value taxation can lower rents.

How are land value taxation going to lower rents? The money may transfer to the government from the landowner but the rent is not going to be any lower.

And there are still institutional barriers to introducing mass produced housing in the dense urban areas. I'm aware of a 2000 square foot building costing $4,000,000 to build. The land was already paid for.

Land value taxation reduces land prices because the tax can't be passed onto tenants via higher rents.

The land price will go down, but the rent doesn't go down. The rent will still reflect the limited supply at the location. Suppose a building gets $50,000 month in rent and a new $25,000 a month land tax is implemented. The price of the building will go down because there is less profit, and the rent is probably as high as the tenants can afford, but the rent isn't going down.

Supply and demand don't change when the land tax is implemented. When the land tax is implemented, land speculators who are simply holding land waiting for price appreciation or holding it for less profitable uses have to now pay the land tax. This compels the speculators to seek tenants or purchasers who are actually going to live on the land, build houses on it, run a profitable enterprise on it, etc., thus lowering rents.

In San Francisco there isn't a large amount land being held for speculation unless it is problematic like contaminated with toxic waste from industry. There are buildings that could be put to more profitable use but the constraint seems to be on the permit end. I know of one old store front where the owner wants to tear down and replace with housing but has difficulties with some government agency.

Not just speculators, but any landowners who are simply collecting land value will seek tenants or sell when the land value is taxed away.

I am aware of the relative improvement and land costs. However, there is extra rents on top of the land cost, by requirements for a code compliant house that make the great majority of new home buyers need a builder. Typically, the builder has monopolized the build able lots. I see a win-win (for land owners and home buyers, but not builders) if there is less specialized knowledge required to convert land + money into housing.

I agree there are some rents being captured by specialized local builders and insiders. But most of the high rents in places like San Francisco are being driven by site value.

AlexT says housing essentially just keeps up with inflation, yet most stocks of public companies go to zero in the long run. It's the handful of Microsoft, IBM, Apple, Walmart, Boeing, etc successful stocks out of the basket of bankrupt and otherwise transformed into something else stocks that make stocks outperform real estate. So I'd say real estate has been a pretty good investment, certainly better than Treasury bills unless you live in some podunk little town.

Not quite all landowners are winners. Recall San Francisco's leaning tower of lawsuits - the Millennium Tower.


How have housing prices compared to construction costs throughout Europe for the past century? Asia?

Higher housing costs, as well as higher education costs, are in much the natural market response to the easy availability to finance, much of with preferential treatment, for buying houses and for higher education. http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

As is pointed out repeatedly here, "there is plenty of cheap land in the US with much lower regulation than the coastal cities." And much of that land also has breathing room, something utterly lacking in Manhattan and San Francisco. Just listen to a first-time visitor from Europe, Japan, or China, visiting someplace that's not Manhattan or San Francisco, marveling at the sheer, incomprehensible quantity of uncrowded space.

Plus, not very many years ago, we were hearing, to the great consternation of, especially, environmentalist types, that Net connectivity was going to destroy the very notion of "place" . Work from anywhere, they said.

And yet, now, it has come to this utterly insatiable urge to cram and jam more millions of people than is really possible - and with absolutely no regard for the expense incurred - onto a few small islands and peninsulas. And when they arrive, their "enhanced productivity" now consists mainly of making a million lines of code do the work of a thousand, at the expense of exponentially increasing confusion for the supposed user of said code. (It was one thing to use, say, the first "start button". It's quite another to have to chase its function down anew every time there's a so-called "upgrade.")

So what in the world happened? Why do our billionaire overlords insist on this cramming-and-jamming, especially when the Net makes it wholly unnecessary? Why do they decree that jobs that pay anything shall only exist where folks have to live four strangers bunked in a fantastically expensive dorm room? What's the urgent need to continually shuffle start buttons and the like at limitless expense? Is the only solution to wait for a social explosion, on the grounds that you must never ever interfere with billionaire overlords, or is some sort of intervention short of an explosion still possible?


Oh, and for those few who actually desire to cram-and-jam ... why, oh why? Yes, it's true that one encounters all sorts of claims about restaurants, culture, and the like. Indeed, such things are alleged to be absent anywhere there might be any breathing room. But the odd thing is that few of the crammed-and-jammed have time for such things. That's why high-tech places like Google are typically tricked out like day-care centers. The inmates have virtually no time to leave the campus, no time to participate in the supposed "culture". What few moments they might have will be expended on the train or freeway. So what's the point?

"The inmates have virtually no time to leave the campus"

Answered your own question

> High housing costs don’t simply redistribute wealth from workers to landowners. High housing costs reduce the return to education reducing the incentive to invest in education. Thus higher housing costs have reduced human capital and the number of skilled workers with potentially significant effects on growth.

Correct me if I'm wrong, but wouldn't it be more accurate to say it reduces returns to human capital and R&D, which increase productivity? That is not at all the same thing as 'education'.

Graduates would rather die than live in flyover states. And who can blame them... #trumpcountry

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