The housing shortage in the US is a perennially popular topic of conversation for the urbanist crowd (which online includes basically everyone.) The basic argument is that housing starts collapsed after the financial crisis and have never truly recovered.
Utilizing neighborhood level data for the years 2009 to 2016, we found that:
For each one percent of all residential units in a neighborhood listed on Airbnb, rental rates in that neighborhood went up by 1.58 percent.
Between 2009 and 2016, approximately 9.2 percent of the citywide increase in rental rates can be attributed to Airbnb.
Airbnb listings were heavily concentrated in parts of Manhattan and Brooklyn and had a greater impact on these neighborhoods. Approximately 20% of the increase in rental rates was due to Airbnb listings in midtown and lower Manhattan including neighborhoods such as Chelsea, Clinton, and Midtown Business District; Murray Hill, Gramercy, and Stuyvesant Town; Chinatown and Lower East Side; Battery Park City, Greenwich Village, and Soho as well as parts of Brooklyn including Greenpoint and Williamsburg.
In aggregate, New York City renters had to pay an additional $616 million in 2016 due to price pressures created by Airbnb, with half of the increase concentrated in the neighborhoods highlighted above.
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Even though most Airbnb rentals are in expensive midtown, this has an effect in other parts of the city because people who could normally afford to live in midtown now have to live in outer areas, pushing those people to even more marginal areas, and at the lowest margin, to homelessness. There are currently 50,000 homeless in shelters ever night, most of them are there due to high housing costs primarily, not mental health or drug use (many of those people unfortunately will not/cannot be sheltered even in public shelters).
There is also actually a glut of housing at the high, luxury end, to the consternation of investors and developers who cannot meet their own projections of sellouts. Many very high end luxury units in new buildings are on the market for years, running up expensive marketing costs while providing no income, causing the overall cost of even high end housing to go even higher to compensate for vacancies.
The most acute shortage is at the low end, of course, where projects do not pencil out, without huge subsidies, or changes in the tax code that cities and state are unwilling (in the case of land value taxation, for example), or unable to make (in the case of upzoning, for example, due to community opposition).
Midtown's an odd neighborhood. While lots of people work there (or did), I'm not sure there's exactly a lot of demand to live there. (Lots of people do live there of course.) When I worked there, I thought about living there, but it's still expensive, and it's extremely focused on generic commercial offices and tourism. I think it's a little less expensive than most of the other expensive neighborhoods in Manhattan – probably because living there isn't as attractive as other neighborhoods. (Living in or near Times Square would be wild, and probably not in a good way for most people.)
Sadly, I _suspect_ that something kinda like the current 'awful' mix of policies/economics are about as close to 'best overall for everyone' as possible.
There's not a lot of support for a lot more construction. That means the housing supply is _mostly_ fixed.
About 15% (?) of renters are really 'quasi-owners' of their apartments via rent control. Their tradeoff is that their landlords generally (almost always?) 'hate' them and generally try to minimize the costs of upkeep and maintenance; a few actively sabotage their living conditions to try and force them to move out. And the landlords, which I'd guess are mostly for-profit businesses, have _extreme_ financial incentives to do so. That's a recipe for a lot of bad behavior. It's probably more remarkable that it's not even more terrible! The consequences of this horrible incentive structure are, or can be, wildly awful! And yet it's also a consequence of all of this that some people can afford to live in one of the most expensive places to live in the world, and for decades (and maybe longer).
Then there's another big proportion of renter's benefiting from rent stabilization. In recent years, that's given them mostly fixed rents, which is very valuable even for people or households that aren't poor or have low incomes. I think this is much less bad – i.e. leads to much less bad consequences – relative to rent control, if only because each new tenant generally allows the landlord to request/demand a 'market' rent.
One big 'catch' for anyone with a rent-controlled or rent-stabilized unit is that they almost certainly can't afford to move somewhere else. Rent-controlled unit vacancies are rare and it seems like they're often used as currency among well-connected people. (Various NYC politicians have been caught having multiple rent-controlled units.)
But supposedly 30+% of residents own their homes – but that's across all five buroughs, and basically parts of all of them except Manhattan are in (relatively dense) 'suburban' areas, e.g. consisting of mostly detached single-family homes.
But, also, NYC isn't itself even a remotely self-contained housing market. For people that work in NYC, their 'potential housing market' often includes up-state New York, Connecticut, New Jersey, Long Island, and even (if rarely) Pennsylvania. As just one example, one former coworker of mine – we worked together in an office in Midtown – originally (as-of when I met them) lived a few hours (by train) east on Long Island. Then they were sharing a studio apartment (co-op) in Manhattan with one of their children who was attending a school also in Manhattan. Later, they sold their Long Island home, and moved to an apartment in Queens. Even later, they moved to an apartment in Jersey City (across the Hudson in New Jersey). Every person, or family/household, has their own 'housing market', but for lots of people, their 'potential housing market' is much larger than the city limits of NYC. AFAICT, the actual 'market' portion of this housing market is mostly in a pretty stable equilibrium. Housing is relatively cheaper farther from Manhattan, but net costs (including, e.g. transportation) are mostly pretty similar.
And in the greater 'metro-area-housing-market', there's not much (if any) slack available for adding a significant number of housing units – and the people that would otherwise like to live in them. If you've ever taken the subway, or any of the trains, into or even towards Manhattan during morning rush-hour, it's pretty hard to imagine how the relevant infrastructure could reasonably accommodate a lot more people. The trains aren't quite as ridiculously crowded as in other parts of the world (e.g. Japan), but they're often pretty close. I was lucky enough that I could get away with not needing to cram myself into already packed subway cars when I was still commuting. That's an example of a more general phenomena of life in or around NYC – a lot of the 'cost' of living there is in the form of annoyance or aggravation.
I just don't think there's a way to 'square this circle'. Some people want fully 'socialist' housing, which would have to involve some kind of city control over who can move to (and live in) the city. The consequent politics would be spectacular, and probably not in a good way. I don't think any more than a tiny fraction of current residents would support a 'fully market' housing system – and there would still be all of the substantial (if not practically insurmountable) obstacles to new construction anyways.
The political control of who gets to live in these cities is already held by landlords who have almost complete selection over tennants and commercial developers who build luxury investment vehicles rather than necessary housing. The city may be corrupt, and may not be truly democratically controlled, but at the very least its incentives are not fundamentally opposed to providing affordable housing, which is the current situation. Giving control of city housing to the people in the city, even in an indirect way, will of course be better for the people in that city than the current system where housing provision is controlled by those who stand to benefit from running up prices and restricting supply.
I don't think of landlords, or their agents, filtering tenants, as they are now, as anything meaningfully like "political control" of who gets to live somewhere. That's just normal commercial relations with (potential) customers. Real estate is generally an expensive and significant investment, for anyone, and 'bad' tenants have a real, if unlikely, potential to cause massive damage to those investments.
I think the main reason that, of the development that _is_ done, most/a-lot of it being "luxury" housing is because that's the only kind that's profitable at all.
I don't in fact agree that "giving control of city housing to the people in the city" would be better. I could be wrong, but I can't figure out anyway that _could_ work, even in principle. Maybe I'm misunderstanding what you mean exactly, but what would that control even look like, in any kind of concrete detail? Would a city agency review applications for people to move to the city? What would be the enforcement regime for 'illegal immigrants' – to the city, not the state or federal territory? Or are you thinking more of the city seizing properties and converting them to 'public housing'? How would that be paid for? Why would anyone be optimistic about _new_ public housing given how generally terrible all of the _existing_ public housing is?
It doesn't seem like "housing provision" IS 'controlled' in any meaningful sense, by anyone in particular. I also don't understand why you think landlords and developers have common interests really. Developers are businesses that earn profits (if they can) by _developing_ properties, e.g. building _new_ housing. New housing is thus competitive with existing housing, i.e. landlords investments. Landlords have an obvious financial interest in restricting supply, but NIMBY-ism doesn't seem to be driven to any real degree by what I think you mean by 'landlords', i.e. businesses that own real estate. Certainly some or even a lot or most NIMBY-ism could be due to 'private landlords', e.g. people that own their condos, homes, or even one or two multi-family buildings. But a lot of it just seems to be driven by people that don't want their own neighborhoods to change, either in some particular direction, or just not 'too much', or even really at all. Developers certainly seem like natural 'enemies' of NIMBY-ism, tho maybe the 'high end' developers prefer not having to compete with the 'low end' ones.
The high prices are the most obvious and reasonable aspect of the whole mess – tho it's also the most painful for residents. Prices are high _because_ people want to live in those places. Prices are also _higher_ than they would otherwise be because of the restrictions that prevent _developers_ from supplying new housing, including 'affordable' housing. Those restrictions also _greatly_ increase the cost of new development, thus also increasing prices, and restrict the number or set of (potentially) profitable development to only the most expensive versions.
"The total number of active short-term rentals in the city’s five boroughs—those listed on Airbnb Inc. and Expedia Group Inc.’s Vrbo—has reached more than 22,000, according to third-party data tracker AirDNA. Meanwhile, rental inventory in Manhattan, Brooklyn and a portion of Queens hovers just over 7,500, according to an April report from broker Douglas Elliman Real Estate. AirDNA defines active listings as those with one reserved or available day in the last month."
"Critics say that Airbnb’s business model makes homes unaffordable in large cities that are attractive for tourists."
There's really no disputing these findings. It's also cutting into the hotel industry, who also point out that these short-term rentals come with far fewer guarantees for safety, inspection of properties, cleaning, and even access issues (some short-term renters have been victims of multiple simultaneous rental agreements, so that several people show up at the same time for a single property; this is fraud).
I, personally, don't care. Hotels in NYC are generally terrible – both as hotels and at being anywhere where I've ever wanted to stay. Ever searched for a hotel in Brooklyn? Brooklyn's huge and there are so few, and so unevenly, and sparsely, distributed, that I switched to Airbnb for myself or on behalf of others because they're significantly better.
I also don't care about hotels and their complaining about "far fewer guarantees for safety, inspection of properties, cleaning, and even access issues" seems, to me, to be exactly the kind of bullshit special pleading of any other kind of 'regulatorily captured' industry. Of course they're upset! They're being out-competed by a superior product/service!
But NYC _could_ have cracked down on Airbnb or similar companies – they could have tried anyways (or pretended to try). But they didn't. And I think a big part of that is that there is a _visible_ constituency for the relevant 'authorities' that is directly benefiting from being Airbnb hosts – and not the hosts with multiple (or many) listings.
But I do NOT believe, basically at all, that completely eliminating Airbnb and similar would do, basically, anything for 'housing affordability'. 'Too many' people want to live there, there are huge and unlikely-to-ever-be-revoked subsidies for a huge fraction of renters, and of course there's the usual restrict-supply-and-subsidize-demand bullshit that's all over the economy generally.
Bill de Blasio floated – out load, in an interview – the idea of NYC, the city government, _entirely socializing housing in the city_. That's the kind of insanity that 'could' make housing affordable – by allowing the city government decide who receives (and gets to keep) the legal privilege to live in the city at all.
I'm very sympathetic to everyone desperately trying to hold onto their rent-controlled or rent-stabilized apartments and, as much as I think it would be 'good' (e.g. for the city as a whole, very-much-somewhat independent of the current residents) to move towards a _more_ free market in (rental) housing, I don't think that will ever be politically feasible, absent a Marvel-movie-style alien invasion that destroys a big chunk of the city's real estate.
I think the current terrible system is probably the only remotely 'reachable' (and roughly) stable equilibrium that's available.
I don't see the point of the comparison: there are also many more dogs than dogwalkers, but what does that have to do with anything? How many rental units are currently available, vs the total number of active AirBnB units, is a number that will obviously fluctuate massively with the demand for rental units. I'm trying to see why the ratio is important and it's just not clear that it means anything. If AirBnBs were a substantial fraction of all units, sure, that's meaningful, and I'd be fine tracking that stat over time. But this just seems like an invented number that means nothing.
"X new industry is harming established business interests" is an argument I find almost uniquely uncompelling. I'm sure stables complained about cars as well when they were getting introduced to cities: absent externalities I'm not sure why I should have a problem. And, of course, banning AirBnB and the like makes those problems get much worse for those who do use them.
As the article opens "The number of short-term rentals in New York City is outpacing the number of available apartments, putting a pinch on renters who are looking for space in a hot housing market." Short-term rentals are, so far, not units that were originally built for that purpose. So they are coming from the existing rental housing stock. Maybe that will change someday and then one can say this is new, additional, stock that would not have been built otherwise. But even then, a short term rental unit in X space means that a long term rental unit cannot be in that same X space. At the very least, that would change the nature of who's living in NYC, especially the most popular midtown areas, though it might free up space from hotels that would otherwise have rooms there. The hotel industry is aware of the threat and is fighting this development as hard as they can, enlisting the hotel workers union too.
They found a correlation, controlled for a few factors, and called it causal, in a panel dataset. This is not particularly convincing to me, particularly given both the data that they had access to and the political pressures to find the right result.
I think one of the problems in this discussion is that the word "shortage" doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?
In Order Without Design, the author did a case study of South Africa, where they had a huge program after apartheid to build millions of good houses for people, but they were hours away from job centers, people cannot afford cars, and unemployment was very high. I don't know if we would say South Africa had (has?) a shortage of housing. Certainly they had many houses. But maybe the fact that all the houses were too far from job centers means they still had a shortage.
We can say a few things with certainty.
a) Since 2010, rents as a % of income have gone up nationally, reversing a long trend.
b) Housing construction is down, the opposite of what you would expect with higher rents.
c) We know why housing construction is down, building is restricted in the markets where people want to live.
d) This is not fully certain, but statistics suggest that the adjustment to lower housing construction since 2010 has been > higher rents > a few million more low-income adults living with their parents. This is true once you hold cultural factors like later marriage constant.
e) Other factors seem to be too small to matter. The number of vacancies actually seems to be down. Also yes there are a few hundred thousand Airbnbs now, but some of these are long term housing, some are still being lived in usually, and in any case, there are 130 million housing units in the US and the "shortage" is in the mid-single digit millions no matter how you cut it, so that's an order of magnitude off.
To me there is a clear trade-off - construction restrictions lead to low-income adults living with their parents, and a transfer of wealth from everyone else to property owners via higher home prices / rents - but I don't know if I would call that a "shortage". A trade-off is just a trade-off. Some people win - property owners get more wealth and their neighborhood stays the same - and some people lose - poor people and young people who don't own property.
What is more interesting to me is that the logical pretzels people go through to deny there is a trade-off! Of course if you reduce housing construction in places where people want to live, fewer people will live there and/or the people that live there will have less space or move in with someone else, how could it be any other way?
But you are correct that you can't reason from a drop-off in construction, you have to figure out *why* construction dropped off - maybe people are happy with their homes, maybe falling population, etc. It's just that here we can clearly see that it's construction restrictions, because construction costs + land costs are diverging from housing prices.
I agree re: the word "shortage", I don't actually think it's especially useful (I thought about trying to clarify this point a bit and opted not to - an earlier iteration had a long part about "shortage" meaning "making supply more elastic and/or shifting the curve")
This post ended up evolving in a sort of strange way that I didn't expect, and ended up being (almost) entirely about non-price indicators - which is obviously a weird thing to do if you're talking about insufficient supply! If I was writing it from scratch, I'd couch things as "We should expect housing prices and real estate costs to be a reliable indicator of how well housing supply is meeting demand, but in practice folks often look at other indicators for (x reasons) Let's take a look at them." (or something) But we operate on a very strict policy of "get stuff out the door even if it's imperfect" here at construction physics industries.
Re: vacancy rate being down, can you share the source for this?
One question I have is that, if rents/prices just inflate themselves to whatever the local market will bear based on incomes, if in practice it's actually possible to build enough to overcome that? The experience of Austin (where prices have gone way up despite them building more than basically anywhere else in the country) makes me less than optimistic.
The vacancy data from ACS is in FRED, I think both homeowner and rental vacancies are clearly down, and it's more pronounced when you look at the places where housing prices / rents are up (as you would expect in theory).
I think it's best to try to look at the ratio of rents to incomes, because that is going to be what people care about. That ratio had historically been going down for decades, but it reversed a decade ago. You can see that in FRED too. I think it's hard to interpret the data as being the result of anything other than low/restricted housing construction. Historically, we constructed enough new housing to keep rents growing more slowly than incomes, but that hasn't been true recently.
I think you have to be careful about looking at local markets because they are not silos, and they are individually small compared to the entire country. Austin especially is really tiny.
Since people and companies can move, you expect some level of convergence in prices among similarly desirable markets. If Austin has become a much more desirable market because of the tech industry, you would expect housing prices to start to converge to comparable markets like Seattle or San Francisco, even if you have a lot of housing construction. Or the reverse, Detroit can have lower rents despite no housing construction because it has become less desirable, relatively, because of the decline of autos and people don't like cole weather.
You can think of it as California exporting their lack of housing construction, creating spillover demand to other markets, pushing up prices everywhere else. Similarly, more housing construction in Austin pulls down housing prices in every other market in the country, since people now have alternatives.
The problem with trying to look at any market in isolation and reasoning from there is you run into a fallacy of composition problem. Yes, if Austin constructs a lot of housing, rents can still go up because the local tech industry is growing which attracts residents from other cities faster than supply can keep up. But clearly that can't be true of the country as a whole - net migration has to equal zero. Higher demand to live in Austin reflects lower demand to live elsewhere.
I think it's similar to thinking about oil and natural gas or something - different forms of energy are substitutes, so a disruption in one will cause a ripple effect in the prices of the others, even if production is high of the others.
"One question I have is that, if rents/prices just inflate themselves to whatever the local market will bear based on incomes, if in practice it's actually possible to build enough to overcome that?"
"housing costs" are really "land costs plus improvement costs". Since they ain't makin' more land, what you're really asking is if it's possible to decrease the cost of the improvement sufficiently to counteract the increase in land costs that higher incomes will of course cause, because supply cannot increase.
In theory, this would be possible. If growth in land costs was < productivity growth in construction, prices should decrease. If you allow the demanded construction anyway..
In reality however, AFAIK construction has no or even negative productivity growth, so the cost of the improvement not only does not counteract the cost of the land at all, it contributes to the rising prices.
On the incomes correlation, one thing to consider is that income differentials between cities may be partly driven by general price index differentials—that is, higher wages are demanded by workers because costs (not just for housing) are higher.
On housing in particular, perhaps a more complete model would control for differences in local property tax growth, as well as prices for real estate services, and construction materials and labor. That is, if you can remove some of the effect of growth in operations costs, you will be left with a figure that is more representative of any economic rents (which is where the effect of supply-demand imbalance would be most concentrated).
"The statistical analysis includes the simple correlation of the various factors with the difference between the housing vacancy rate and the average of the vacancy rate over the period for which historical data are available, or vacancy gap, across metro areas. The average vacancy rate is a proxy for the equilibrium vacancy rate, or that vacancy consistent with house prices and rents growing at the pace of household incomes and construction costs. Each of the factors is meaningfully negatively correlated with the vacancy rate, though the correlation coefficients for labor and lumber are lower than for the land share and AD&C underwriting standards."
Through all these charts, as you mention, there's a cloud of uncorrelated data points and then the Bay Area, Portland, Seattle, Denver, Austin, Boston etc. If you split away those hip cities, there are plenty of things you could say about them, and with the rest of the US there are valid questions about whether there is or isn't a housing shortage. Why not treat this as two separate questions? After a lot of diligent work, the one really convincing insight I see is "The top 15 cities have a housing shortage for predictable and apparent reasons. Everywhere else, all bets are off"
The last correlation between incomes and rents is actually a result of the supply shortage. Cities that lack adequate supply have been separating from other cities as rents rise, poorer residents must systematically move away to more affordable places, and the income of remaining residents compositionally rises as a result of the lack of housing. Migration patterns are a helpful clue about the problem and the anomalous trends we have as a result of it compared to previous eras when urban housing wasn’t as constrained.
Murray's piece (I mentioned in a comment above), says, "Zoning regulations increase the relative desirability and amenity of areas." The idea is that it MAY be that zoning increases prices not because it reduces supply but because it increases desirability of the zoned areas. First I've heard that idea but it seems intuitive.
I'd argue that there certainly has to be some truth to the idea that some zoning restrictions can provide amenity value, but it is in fact not a dominant factor in our current situation. The reason is that one systematic and defining characteristic of supply deprived cities is that property values rise the most in the least affluent neighborhoods. Supply constraints create a distinct set of clues, and there really is no mistaking it.
3. Is it a shortage of "all housing" or rather "single family homes"? Condos are still affordable in most cities and don't see the infamous bidding wars that SFHs do.
I observe that in Seattle Metro, there appears to be greatest price rises, and "shortages" in free standing single family houses. Allowing more "density" (in whatever form) won't satisfy a demand for nice SFH.
I am surprised you never mention the elephant in the room - rent control.
It makes it harder to discover the true rent (one has to pay a large lump sum to the previous tenant to get a rent-controlled apartment) and it discourages rental housing construction.
Do you really think that these effects are best observable indirectly, as rent and construction?!
Thanks for putting numbers and nice graphs for this important issue. Has there been any recent change to the part of total capital that's real estate? In modern economies it has remained around 30% of total capital for the last few centuries - no matter how much financial capital increases. Can't find a good ref at the moment but sure can come up with a bit more search.
Basically once food costs fall as % of income, most people keep paying, on average, about 30% of their income for housing. And this will hurt the less wealthy more when the wealth distribution becomes more skewed.
I loved this post. The underlying demographics might be a better indicator than population or households. In other words, there are undercurrents including how long retirees are staying in their houses, the supply/demand balance of apartments (and hence higher or lower rents comparatively) which could affect the decision to buy a house, higher divorce rates leading to more housing needed, and family formation among 30 year olds, which is a key demographic that moves from apartments to houses. Add in wages and supply and demand of high end houses vs entry level houses, and it gets quite complex. But if there is a shortage of housing units, it’s important to figure out where that shortage is, so it can be better addressed?
Not a particularly helpful way to frame the issue.
What about, “Are there land use and building code changes that would create value, much of which would go to the occupants of the new housing and commercial developments?”
Excellent article, thank you for sharing. That being said, my own particular research indicates that the ultra-accommodating monetary policies post-GFC (zero interest rates, quantitative easing, etc) have had a stronger impact on the housing market than demographics, changes in cultural trends, size of households, etc. All that easy money had to be allocated somewhere, and the equity and real estate markets were the most obvious destinations. Hence, the bull run.
I wonder how that's going to change in the post-COVID world: stubbornly high inflation, 5% interest rates, quantitative tightening, etc. Surely there has to be an impact on the housing market? The rules of the game have changed significantly: gone are the days of sub-3% mortgages that could easily be refinanced for a profit in an ever-raising bull market. Now a days, the outlook is far grimmer: 6%+ mortgage with unclear views on whether your home price/equity might go up at all in the following years. The real estate market as an investment class is not the slam dunk it had been during the last 12 years, and that surely has to dampen down demand.
Might be good to look at job growth. I ran a few regressions since the GFC to 2021 and found that job growth is the most correlated with rent growth (highest R^2) when compared to population growth and affordability vis a vis median HH income.
"Part of what’s screwing with our correlations here is likely spillover demand"
This cannot be tacked on at the end like an afterthought. It is the main thing. The reason something is expensive is because everyone wants it. Prices are set by people who want things, not people who obtain them.
Attempts at a fine-grained analysis will always fail because the dynamics are too complex. It's painful for scientifically minded people, but it's the way it is. The coarse factors, however, remain the same: the US keeps getting bigger, demand focuses on certain metro areas, and there are many other metro area that remain affordable (in the sense that a decent quality of life is affordable) because they are less desired, willing to sprawl, and so on.
Saying that there's no mismatch between population / construction and then saying you *do* see a connection with restrictions on building is contradictory. That's what a mismatch between population / construction is. The demand for those unbuilt buildings is coming from somewhere.
There's another factor (probably several) in large popular cites: short-term rental services like Airbnb. Our comptroller prepared a report a few years ago: https://comptroller.nyc.gov/reports/the-impact-of-airbnb-on-nyc-rents
Utilizing neighborhood level data for the years 2009 to 2016, we found that:
For each one percent of all residential units in a neighborhood listed on Airbnb, rental rates in that neighborhood went up by 1.58 percent.
Between 2009 and 2016, approximately 9.2 percent of the citywide increase in rental rates can be attributed to Airbnb.
Airbnb listings were heavily concentrated in parts of Manhattan and Brooklyn and had a greater impact on these neighborhoods. Approximately 20% of the increase in rental rates was due to Airbnb listings in midtown and lower Manhattan including neighborhoods such as Chelsea, Clinton, and Midtown Business District; Murray Hill, Gramercy, and Stuyvesant Town; Chinatown and Lower East Side; Battery Park City, Greenwich Village, and Soho as well as parts of Brooklyn including Greenpoint and Williamsburg.
In aggregate, New York City renters had to pay an additional $616 million in 2016 due to price pressures created by Airbnb, with half of the increase concentrated in the neighborhoods highlighted above.
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Even though most Airbnb rentals are in expensive midtown, this has an effect in other parts of the city because people who could normally afford to live in midtown now have to live in outer areas, pushing those people to even more marginal areas, and at the lowest margin, to homelessness. There are currently 50,000 homeless in shelters ever night, most of them are there due to high housing costs primarily, not mental health or drug use (many of those people unfortunately will not/cannot be sheltered even in public shelters).
There is also actually a glut of housing at the high, luxury end, to the consternation of investors and developers who cannot meet their own projections of sellouts. Many very high end luxury units in new buildings are on the market for years, running up expensive marketing costs while providing no income, causing the overall cost of even high end housing to go even higher to compensate for vacancies.
The most acute shortage is at the low end, of course, where projects do not pencil out, without huge subsidies, or changes in the tax code that cities and state are unwilling (in the case of land value taxation, for example), or unable to make (in the case of upzoning, for example, due to community opposition).
Midtown's an odd neighborhood. While lots of people work there (or did), I'm not sure there's exactly a lot of demand to live there. (Lots of people do live there of course.) When I worked there, I thought about living there, but it's still expensive, and it's extremely focused on generic commercial offices and tourism. I think it's a little less expensive than most of the other expensive neighborhoods in Manhattan – probably because living there isn't as attractive as other neighborhoods. (Living in or near Times Square would be wild, and probably not in a good way for most people.)
Sadly, I _suspect_ that something kinda like the current 'awful' mix of policies/economics are about as close to 'best overall for everyone' as possible.
There's not a lot of support for a lot more construction. That means the housing supply is _mostly_ fixed.
About 15% (?) of renters are really 'quasi-owners' of their apartments via rent control. Their tradeoff is that their landlords generally (almost always?) 'hate' them and generally try to minimize the costs of upkeep and maintenance; a few actively sabotage their living conditions to try and force them to move out. And the landlords, which I'd guess are mostly for-profit businesses, have _extreme_ financial incentives to do so. That's a recipe for a lot of bad behavior. It's probably more remarkable that it's not even more terrible! The consequences of this horrible incentive structure are, or can be, wildly awful! And yet it's also a consequence of all of this that some people can afford to live in one of the most expensive places to live in the world, and for decades (and maybe longer).
Then there's another big proportion of renter's benefiting from rent stabilization. In recent years, that's given them mostly fixed rents, which is very valuable even for people or households that aren't poor or have low incomes. I think this is much less bad – i.e. leads to much less bad consequences – relative to rent control, if only because each new tenant generally allows the landlord to request/demand a 'market' rent.
One big 'catch' for anyone with a rent-controlled or rent-stabilized unit is that they almost certainly can't afford to move somewhere else. Rent-controlled unit vacancies are rare and it seems like they're often used as currency among well-connected people. (Various NYC politicians have been caught having multiple rent-controlled units.)
But supposedly 30+% of residents own their homes – but that's across all five buroughs, and basically parts of all of them except Manhattan are in (relatively dense) 'suburban' areas, e.g. consisting of mostly detached single-family homes.
But, also, NYC isn't itself even a remotely self-contained housing market. For people that work in NYC, their 'potential housing market' often includes up-state New York, Connecticut, New Jersey, Long Island, and even (if rarely) Pennsylvania. As just one example, one former coworker of mine – we worked together in an office in Midtown – originally (as-of when I met them) lived a few hours (by train) east on Long Island. Then they were sharing a studio apartment (co-op) in Manhattan with one of their children who was attending a school also in Manhattan. Later, they sold their Long Island home, and moved to an apartment in Queens. Even later, they moved to an apartment in Jersey City (across the Hudson in New Jersey). Every person, or family/household, has their own 'housing market', but for lots of people, their 'potential housing market' is much larger than the city limits of NYC. AFAICT, the actual 'market' portion of this housing market is mostly in a pretty stable equilibrium. Housing is relatively cheaper farther from Manhattan, but net costs (including, e.g. transportation) are mostly pretty similar.
And in the greater 'metro-area-housing-market', there's not much (if any) slack available for adding a significant number of housing units – and the people that would otherwise like to live in them. If you've ever taken the subway, or any of the trains, into or even towards Manhattan during morning rush-hour, it's pretty hard to imagine how the relevant infrastructure could reasonably accommodate a lot more people. The trains aren't quite as ridiculously crowded as in other parts of the world (e.g. Japan), but they're often pretty close. I was lucky enough that I could get away with not needing to cram myself into already packed subway cars when I was still commuting. That's an example of a more general phenomena of life in or around NYC – a lot of the 'cost' of living there is in the form of annoyance or aggravation.
I just don't think there's a way to 'square this circle'. Some people want fully 'socialist' housing, which would have to involve some kind of city control over who can move to (and live in) the city. The consequent politics would be spectacular, and probably not in a good way. I don't think any more than a tiny fraction of current residents would support a 'fully market' housing system – and there would still be all of the substantial (if not practically insurmountable) obstacles to new construction anyways.
The political control of who gets to live in these cities is already held by landlords who have almost complete selection over tennants and commercial developers who build luxury investment vehicles rather than necessary housing. The city may be corrupt, and may not be truly democratically controlled, but at the very least its incentives are not fundamentally opposed to providing affordable housing, which is the current situation. Giving control of city housing to the people in the city, even in an indirect way, will of course be better for the people in that city than the current system where housing provision is controlled by those who stand to benefit from running up prices and restricting supply.
I don't think of landlords, or their agents, filtering tenants, as they are now, as anything meaningfully like "political control" of who gets to live somewhere. That's just normal commercial relations with (potential) customers. Real estate is generally an expensive and significant investment, for anyone, and 'bad' tenants have a real, if unlikely, potential to cause massive damage to those investments.
I think the main reason that, of the development that _is_ done, most/a-lot of it being "luxury" housing is because that's the only kind that's profitable at all.
I don't in fact agree that "giving control of city housing to the people in the city" would be better. I could be wrong, but I can't figure out anyway that _could_ work, even in principle. Maybe I'm misunderstanding what you mean exactly, but what would that control even look like, in any kind of concrete detail? Would a city agency review applications for people to move to the city? What would be the enforcement regime for 'illegal immigrants' – to the city, not the state or federal territory? Or are you thinking more of the city seizing properties and converting them to 'public housing'? How would that be paid for? Why would anyone be optimistic about _new_ public housing given how generally terrible all of the _existing_ public housing is?
It doesn't seem like "housing provision" IS 'controlled' in any meaningful sense, by anyone in particular. I also don't understand why you think landlords and developers have common interests really. Developers are businesses that earn profits (if they can) by _developing_ properties, e.g. building _new_ housing. New housing is thus competitive with existing housing, i.e. landlords investments. Landlords have an obvious financial interest in restricting supply, but NIMBY-ism doesn't seem to be driven to any real degree by what I think you mean by 'landlords', i.e. businesses that own real estate. Certainly some or even a lot or most NIMBY-ism could be due to 'private landlords', e.g. people that own their condos, homes, or even one or two multi-family buildings. But a lot of it just seems to be driven by people that don't want their own neighborhoods to change, either in some particular direction, or just not 'too much', or even really at all. Developers certainly seem like natural 'enemies' of NIMBY-ism, tho maybe the 'high end' developers prefer not having to compete with the 'low end' ones.
The high prices are the most obvious and reasonable aspect of the whole mess – tho it's also the most painful for residents. Prices are high _because_ people want to live in those places. Prices are also _higher_ than they would otherwise be because of the restrictions that prevent _developers_ from supplying new housing, including 'affordable' housing. Those restrictions also _greatly_ increase the cost of new development, thus also increasing prices, and restrict the number or set of (potentially) profitable development to only the most expensive versions.
More evidence that the "short term rental" market, exemplified by Airbnb, is sucking space from the long-term rental market, at a 3:1 ratio, says a new report: https://www.crainsnewyork.com/real-estate/nyc-has-3-times-more-airbnb-listings-apartments-rent
"The total number of active short-term rentals in the city’s five boroughs—those listed on Airbnb Inc. and Expedia Group Inc.’s Vrbo—has reached more than 22,000, according to third-party data tracker AirDNA. Meanwhile, rental inventory in Manhattan, Brooklyn and a portion of Queens hovers just over 7,500, according to an April report from broker Douglas Elliman Real Estate. AirDNA defines active listings as those with one reserved or available day in the last month."
"Critics say that Airbnb’s business model makes homes unaffordable in large cities that are attractive for tourists."
There's really no disputing these findings. It's also cutting into the hotel industry, who also point out that these short-term rentals come with far fewer guarantees for safety, inspection of properties, cleaning, and even access issues (some short-term renters have been victims of multiple simultaneous rental agreements, so that several people show up at the same time for a single property; this is fraud).
I, personally, don't care. Hotels in NYC are generally terrible – both as hotels and at being anywhere where I've ever wanted to stay. Ever searched for a hotel in Brooklyn? Brooklyn's huge and there are so few, and so unevenly, and sparsely, distributed, that I switched to Airbnb for myself or on behalf of others because they're significantly better.
I also don't care about hotels and their complaining about "far fewer guarantees for safety, inspection of properties, cleaning, and even access issues" seems, to me, to be exactly the kind of bullshit special pleading of any other kind of 'regulatorily captured' industry. Of course they're upset! They're being out-competed by a superior product/service!
But NYC _could_ have cracked down on Airbnb or similar companies – they could have tried anyways (or pretended to try). But they didn't. And I think a big part of that is that there is a _visible_ constituency for the relevant 'authorities' that is directly benefiting from being Airbnb hosts – and not the hosts with multiple (or many) listings.
But I do NOT believe, basically at all, that completely eliminating Airbnb and similar would do, basically, anything for 'housing affordability'. 'Too many' people want to live there, there are huge and unlikely-to-ever-be-revoked subsidies for a huge fraction of renters, and of course there's the usual restrict-supply-and-subsidize-demand bullshit that's all over the economy generally.
Bill de Blasio floated – out load, in an interview – the idea of NYC, the city government, _entirely socializing housing in the city_. That's the kind of insanity that 'could' make housing affordable – by allowing the city government decide who receives (and gets to keep) the legal privilege to live in the city at all.
I'm very sympathetic to everyone desperately trying to hold onto their rent-controlled or rent-stabilized apartments and, as much as I think it would be 'good' (e.g. for the city as a whole, very-much-somewhat independent of the current residents) to move towards a _more_ free market in (rental) housing, I don't think that will ever be politically feasible, absent a Marvel-movie-style alien invasion that destroys a big chunk of the city's real estate.
I think the current terrible system is probably the only remotely 'reachable' (and roughly) stable equilibrium that's available.
I don't see the point of the comparison: there are also many more dogs than dogwalkers, but what does that have to do with anything? How many rental units are currently available, vs the total number of active AirBnB units, is a number that will obviously fluctuate massively with the demand for rental units. I'm trying to see why the ratio is important and it's just not clear that it means anything. If AirBnBs were a substantial fraction of all units, sure, that's meaningful, and I'd be fine tracking that stat over time. But this just seems like an invented number that means nothing.
"X new industry is harming established business interests" is an argument I find almost uniquely uncompelling. I'm sure stables complained about cars as well when they were getting introduced to cities: absent externalities I'm not sure why I should have a problem. And, of course, banning AirBnB and the like makes those problems get much worse for those who do use them.
As the article opens "The number of short-term rentals in New York City is outpacing the number of available apartments, putting a pinch on renters who are looking for space in a hot housing market." Short-term rentals are, so far, not units that were originally built for that purpose. So they are coming from the existing rental housing stock. Maybe that will change someday and then one can say this is new, additional, stock that would not have been built otherwise. But even then, a short term rental unit in X space means that a long term rental unit cannot be in that same X space. At the very least, that would change the nature of who's living in NYC, especially the most popular midtown areas, though it might free up space from hotels that would otherwise have rooms there. The hotel industry is aware of the threat and is fighting this development as hard as they can, enlisting the hotel workers union too.
They found a correlation, controlled for a few factors, and called it causal, in a panel dataset. This is not particularly convincing to me, particularly given both the data that they had access to and the political pressures to find the right result.
I think one of the problems in this discussion is that the word "shortage" doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?
In Order Without Design, the author did a case study of South Africa, where they had a huge program after apartheid to build millions of good houses for people, but they were hours away from job centers, people cannot afford cars, and unemployment was very high. I don't know if we would say South Africa had (has?) a shortage of housing. Certainly they had many houses. But maybe the fact that all the houses were too far from job centers means they still had a shortage.
We can say a few things with certainty.
a) Since 2010, rents as a % of income have gone up nationally, reversing a long trend.
b) Housing construction is down, the opposite of what you would expect with higher rents.
c) We know why housing construction is down, building is restricted in the markets where people want to live.
d) This is not fully certain, but statistics suggest that the adjustment to lower housing construction since 2010 has been > higher rents > a few million more low-income adults living with their parents. This is true once you hold cultural factors like later marriage constant.
e) Other factors seem to be too small to matter. The number of vacancies actually seems to be down. Also yes there are a few hundred thousand Airbnbs now, but some of these are long term housing, some are still being lived in usually, and in any case, there are 130 million housing units in the US and the "shortage" is in the mid-single digit millions no matter how you cut it, so that's an order of magnitude off.
To me there is a clear trade-off - construction restrictions lead to low-income adults living with their parents, and a transfer of wealth from everyone else to property owners via higher home prices / rents - but I don't know if I would call that a "shortage". A trade-off is just a trade-off. Some people win - property owners get more wealth and their neighborhood stays the same - and some people lose - poor people and young people who don't own property.
What is more interesting to me is that the logical pretzels people go through to deny there is a trade-off! Of course if you reduce housing construction in places where people want to live, fewer people will live there and/or the people that live there will have less space or move in with someone else, how could it be any other way?
But you are correct that you can't reason from a drop-off in construction, you have to figure out *why* construction dropped off - maybe people are happy with their homes, maybe falling population, etc. It's just that here we can clearly see that it's construction restrictions, because construction costs + land costs are diverging from housing prices.
I agree re: the word "shortage", I don't actually think it's especially useful (I thought about trying to clarify this point a bit and opted not to - an earlier iteration had a long part about "shortage" meaning "making supply more elastic and/or shifting the curve")
This post ended up evolving in a sort of strange way that I didn't expect, and ended up being (almost) entirely about non-price indicators - which is obviously a weird thing to do if you're talking about insufficient supply! If I was writing it from scratch, I'd couch things as "We should expect housing prices and real estate costs to be a reliable indicator of how well housing supply is meeting demand, but in practice folks often look at other indicators for (x reasons) Let's take a look at them." (or something) But we operate on a very strict policy of "get stuff out the door even if it's imperfect" here at construction physics industries.
Re: vacancy rate being down, can you share the source for this?
One question I have is that, if rents/prices just inflate themselves to whatever the local market will bear based on incomes, if in practice it's actually possible to build enough to overcome that? The experience of Austin (where prices have gone way up despite them building more than basically anywhere else in the country) makes me less than optimistic.
The vacancy data from ACS is in FRED, I think both homeowner and rental vacancies are clearly down, and it's more pronounced when you look at the places where housing prices / rents are up (as you would expect in theory).
I think it's best to try to look at the ratio of rents to incomes, because that is going to be what people care about. That ratio had historically been going down for decades, but it reversed a decade ago. You can see that in FRED too. I think it's hard to interpret the data as being the result of anything other than low/restricted housing construction. Historically, we constructed enough new housing to keep rents growing more slowly than incomes, but that hasn't been true recently.
I think you have to be careful about looking at local markets because they are not silos, and they are individually small compared to the entire country. Austin especially is really tiny.
Since people and companies can move, you expect some level of convergence in prices among similarly desirable markets. If Austin has become a much more desirable market because of the tech industry, you would expect housing prices to start to converge to comparable markets like Seattle or San Francisco, even if you have a lot of housing construction. Or the reverse, Detroit can have lower rents despite no housing construction because it has become less desirable, relatively, because of the decline of autos and people don't like cole weather.
You can think of it as California exporting their lack of housing construction, creating spillover demand to other markets, pushing up prices everywhere else. Similarly, more housing construction in Austin pulls down housing prices in every other market in the country, since people now have alternatives.
The problem with trying to look at any market in isolation and reasoning from there is you run into a fallacy of composition problem. Yes, if Austin constructs a lot of housing, rents can still go up because the local tech industry is growing which attracts residents from other cities faster than supply can keep up. But clearly that can't be true of the country as a whole - net migration has to equal zero. Higher demand to live in Austin reflects lower demand to live elsewhere.
I think it's similar to thinking about oil and natural gas or something - different forms of energy are substitutes, so a disruption in one will cause a ripple effect in the prices of the others, even if production is high of the others.
"One question I have is that, if rents/prices just inflate themselves to whatever the local market will bear based on incomes, if in practice it's actually possible to build enough to overcome that?"
"housing costs" are really "land costs plus improvement costs". Since they ain't makin' more land, what you're really asking is if it's possible to decrease the cost of the improvement sufficiently to counteract the increase in land costs that higher incomes will of course cause, because supply cannot increase.
In theory, this would be possible. If growth in land costs was < productivity growth in construction, prices should decrease. If you allow the demanded construction anyway..
In reality however, AFAIK construction has no or even negative productivity growth, so the cost of the improvement not only does not counteract the cost of the land at all, it contributes to the rising prices.
On the incomes correlation, one thing to consider is that income differentials between cities may be partly driven by general price index differentials—that is, higher wages are demanded by workers because costs (not just for housing) are higher.
On housing in particular, perhaps a more complete model would control for differences in local property tax growth, as well as prices for real estate services, and construction materials and labor. That is, if you can remove some of the effect of growth in operations costs, you will be left with a figure that is more representative of any economic rents (which is where the effect of supply-demand imbalance would be most concentrated).
See https://www.urban.org/sites/default/files/publication/103940/overcoming-the-nations-daunting-housing-supply-shortage_0.pdf
"The statistical analysis includes the simple correlation of the various factors with the difference between the housing vacancy rate and the average of the vacancy rate over the period for which historical data are available, or vacancy gap, across metro areas. The average vacancy rate is a proxy for the equilibrium vacancy rate, or that vacancy consistent with house prices and rents growing at the pace of household incomes and construction costs. Each of the factors is meaningfully negatively correlated with the vacancy rate, though the correlation coefficients for labor and lumber are lower than for the land share and AD&C underwriting standards."
Through all these charts, as you mention, there's a cloud of uncorrelated data points and then the Bay Area, Portland, Seattle, Denver, Austin, Boston etc. If you split away those hip cities, there are plenty of things you could say about them, and with the rest of the US there are valid questions about whether there is or isn't a housing shortage. Why not treat this as two separate questions? After a lot of diligent work, the one really convincing insight I see is "The top 15 cities have a housing shortage for predictable and apparent reasons. Everywhere else, all bets are off"
The last correlation between incomes and rents is actually a result of the supply shortage. Cities that lack adequate supply have been separating from other cities as rents rise, poorer residents must systematically move away to more affordable places, and the income of remaining residents compositionally rises as a result of the lack of housing. Migration patterns are a helpful clue about the problem and the anomalous trends we have as a result of it compared to previous eras when urban housing wasn’t as constrained.
Murray's piece (I mentioned in a comment above), says, "Zoning regulations increase the relative desirability and amenity of areas." The idea is that it MAY be that zoning increases prices not because it reduces supply but because it increases desirability of the zoned areas. First I've heard that idea but it seems intuitive.
I'd argue that there certainly has to be some truth to the idea that some zoning restrictions can provide amenity value, but it is in fact not a dominant factor in our current situation. The reason is that one systematic and defining characteristic of supply deprived cities is that property values rise the most in the least affluent neighborhoods. Supply constraints create a distinct set of clues, and there really is no mistaking it.
1. On Tokyo/Japan, see this interesting post on how they've managed to keep low housing prices: https://politics.stackexchange.com/questions/18444/have-any-cities-with-a-good-economy-managed-to-prevent-rapid-increases-in-real/73077#73077
2. Could low mortgage rates play a role here, making it easy for many people to afford seemingly expensive housing? I did a post recently looking at that angle: https://nsokolsky.substack.com/p/are-housing-prices-worse-than-ever
3. Is it a shortage of "all housing" or rather "single family homes"? Condos are still affordable in most cities and don't see the infamous bidding wars that SFHs do.
I observe that in Seattle Metro, there appears to be greatest price rises, and "shortages" in free standing single family houses. Allowing more "density" (in whatever form) won't satisfy a demand for nice SFH.
I am surprised you never mention the elephant in the room - rent control.
It makes it harder to discover the true rent (one has to pay a large lump sum to the previous tenant to get a rent-controlled apartment) and it discourages rental housing construction.
Do you really think that these effects are best observable indirectly, as rent and construction?!
Thanks for putting numbers and nice graphs for this important issue. Has there been any recent change to the part of total capital that's real estate? In modern economies it has remained around 30% of total capital for the last few centuries - no matter how much financial capital increases. Can't find a good ref at the moment but sure can come up with a bit more search.
Basically once food costs fall as % of income, most people keep paying, on average, about 30% of their income for housing. And this will hurt the less wealthy more when the wealth distribution becomes more skewed.
I loved this post. The underlying demographics might be a better indicator than population or households. In other words, there are undercurrents including how long retirees are staying in their houses, the supply/demand balance of apartments (and hence higher or lower rents comparatively) which could affect the decision to buy a house, higher divorce rates leading to more housing needed, and family formation among 30 year olds, which is a key demographic that moves from apartments to houses. Add in wages and supply and demand of high end houses vs entry level houses, and it gets quite complex. But if there is a shortage of housing units, it’s important to figure out where that shortage is, so it can be better addressed?
Not a particularly helpful way to frame the issue.
What about, “Are there land use and building code changes that would create value, much of which would go to the occupants of the new housing and commercial developments?”
Excellent article, thank you for sharing. That being said, my own particular research indicates that the ultra-accommodating monetary policies post-GFC (zero interest rates, quantitative easing, etc) have had a stronger impact on the housing market than demographics, changes in cultural trends, size of households, etc. All that easy money had to be allocated somewhere, and the equity and real estate markets were the most obvious destinations. Hence, the bull run.
I wonder how that's going to change in the post-COVID world: stubbornly high inflation, 5% interest rates, quantitative tightening, etc. Surely there has to be an impact on the housing market? The rules of the game have changed significantly: gone are the days of sub-3% mortgages that could easily be refinanced for a profit in an ever-raising bull market. Now a days, the outlook is far grimmer: 6%+ mortgage with unclear views on whether your home price/equity might go up at all in the following years. The real estate market as an investment class is not the slam dunk it had been during the last 12 years, and that surely has to dampen down demand.
Might be good to look at job growth. I ran a few regressions since the GFC to 2021 and found that job growth is the most correlated with rent growth (highest R^2) when compared to population growth and affordability vis a vis median HH income.
"Part of what’s screwing with our correlations here is likely spillover demand"
This cannot be tacked on at the end like an afterthought. It is the main thing. The reason something is expensive is because everyone wants it. Prices are set by people who want things, not people who obtain them.
Attempts at a fine-grained analysis will always fail because the dynamics are too complex. It's painful for scientifically minded people, but it's the way it is. The coarse factors, however, remain the same: the US keeps getting bigger, demand focuses on certain metro areas, and there are many other metro area that remain affordable (in the sense that a decent quality of life is affordable) because they are less desired, willing to sprawl, and so on.
Saying that there's no mismatch between population / construction and then saying you *do* see a connection with restrictions on building is contradictory. That's what a mismatch between population / construction is. The demand for those unbuilt buildings is coming from somewhere.
Corruption. Maybe extend homeless addiction services to landlords and developers? 🤔
Who benefits from increasing human and drug trafficking?
Addicts, that's who.
Great post!
I am confused. I thought housing prices usually mean the price of buying a house, not the price of rent.