Discover more from Vancouver Needs More Housing
Stuck! The Law and Economics of Residential Stagnation (Schleicher, 2017)
Housing scarcity is a problem for the national economy
In Stuck! The Law and Economics of Residential Stagnation (2017), David Schleicher describes how people in the US are moving between states less than they used to (“interstate mobility”). In particular, lower-skilled workers are not moving to high-wage regions.
Bankers and technologists continue to move from Mississippi or Arkansas to New York or Silicon Valley, but few janitors make similar moves, despite the higher nominal wages on offer in rich regions for all types of jobs. As a result, local economic booms no longer create boomtowns.
This is a problem for the entire national economy. The central bank raises and lowers the interest rate to keep inflation and unemployment stable - but what happens when you have one region that’s overheating and another region that’s economically depressed, and people are no longer able to move from one to the other?
Lower mobility reduces the economic benefits of cities (“aggolomeration”). With deeper labour markets, you have less firm-specific risk (it’s easier to switch jobs if your employer goes under), and you’re able to increase your wages by specializing. There’s also economic benefits from “information spillovers” - people working for different companies learn from each other.
A primary agglomeration benefit of deeper labor markets is that they simultaneously allow greater specialization and reduce firm-specific risk. For example, actors in Los Angeles have all sorts of advantages over actors in Milwaukee. A Los Angeles actor can increase his wages by specializing in, say, the role of a zombie or mafia henchman. By contrast, a Milwaukee actor has to play whatever roles he can come by. A Los Angeles actor can safely invest in human capital knowing that there will be jobs he can access without moving. The Los Angeles actor has “insurance” that a firm-specific failure—the owner of a theater investing with Bernie Madoff, for example—will not leave him jobless and forced to move. On the other hand, a similar firm-specific failure at one of the relatively few theaters in Milwaukee could end an actor’s career in that city.
… Economists use estimates of these lost labor market gains—that is, the higher wages people would earn in more productive regions—to estimate the cost of land-use restrictions. In a blockbuster study, economists Chang-Tai Hsieh and Enrico Moretti found that land-use restriction lowered aggregate U.S. growth by more than 50% from 1964 to 2009.
When people find it difficult to move from poor regions to greater economic opportunity, you get less social mobility (children doing better than their parents). It also increases the costs of the social safety net.
Schleicher goes on to discuss specific barriers to entry and exit:
State-level occupational licensing
State-level variations in social programs
History of land-use regulations in the US:
Of limits on mobility, the best understood in the legal and economic literatures are land-use regulations. Before the 1970s, land-use restrictions (zoning laws, subdivision regulations, historic preservation, and so on) limited access to some towns or communities, usually rich suburbs. They did not, however, cap housing construction in entire metropolitan regions. Builders could always construct new housing, either in downtowns or on the urban fringe.
Something dramatic happened to land-use regulation in the 1970s and 1980s: it became much, much stricter. Importantly, while this phenomenon affected all types of municipalities—from urban downtowns to inner-ring suburbs to exurbs—it only occurred in particular regions of the country. In particular, coastal metropolitan regions like San Francisco, New York, and Boston restricted construction in cities, suburbs, and exurbs. Because these popular regions restricted new housing, demand for living space outpaced supply. Housing prices soared, but population growth did not.
In contrast to these coastal regions, Southern and Southwestern metropolitan areas like Houston, Phoenix, and Atlanta continued to impose minimal land-use restrictions. Though demand to live in these regions grew as well, this demand led to increased housing construction and population, rather than substantially higher housing prices.
Impact on low-income workers:
Land-use restrictions also contribute to economic inequality. Because these restrictions raise the cost of housing, they disproportionately prevent poor and working-class people from taking advantage of high-wage job markets. Housing costs eat up a larger percentage of a poor person’s paycheck than that of a wealthy person. Thus, even in a city that can provide marginally higher wages, low-income persons simply may not be able to afford the cost of living in rich, land-use-restricted areas. While nominal incomes for janitors in New York are much higher than in poor states in the Deep South, real incomes, factoring in housing costs, are lower. As a result, restrictive land-use rules have meant that poor and middle-class people have little incentive to move to places where higher incomes are available. Therefore, these restrictions reduce labor income at the bottom of the income distribution.
Homeownership as an obstacle to mobility:
David Blanchflower and Andrew Oswald have shown that homeownership rates correlate with substantially higher unemployment: “[A] doubling of home-ownership in a state would be associated in the steady state with more than a doubling of the unemployment rate.” They also find that homeownership rates result in substantially lower labor mobility.
… During economic downturns, homeownership might have a particularly negative effect on exit. Fernando Ferriera, Joseph Gyourko, and Joseph Tracy find that owners with negative equity face “lock-in” effects. They cannot move because the revenue from the sale of the home does not cover the loan balance. Further, these homeowners might be loss-averse. As housing prices decline, people might be unwilling to take substantial losses on the value of their home—even if taking a loss would be rational. “Owners suffering from negative equity are one-third less mobile, and every added $1000 in real annual mortgage costs lowers mobility by about 12%.”
Another barrier to exit: property transfer taxes.
Some states limit annual increases in property valuation for tax purposes, but require full revaluation upon sale. This practice became common after California passed Proposition 13 in 1978. Owners therefore have a disincentive to sell, since they cannot transfer the tax benefit to the next owner. As a result, people stay in their homes longer. Real estate transfer taxes, which vary widely across the United States, are direct limitations on mobility. A family that wants to sell its house and move out of Washington State, for instance, will lose a full two percent of the value of its home in estate transfer taxes.
Some suggestions for federal policy:
The federal government could also create tax incentives for states and localities that decrease entry limits. On the one hand, it could hand out carrots for good behavior. For instance, Josh Barro has suggested a Race-to-the-Top-style program for localities that increase housing construction. And if the carrot fails, policymakers could try a stick. Noting that homeowners tend to push for restrictive housing policies and also tend to reap the benefits, Edward Glaeser and Joseph Gyourko propose that the federal government suspend the mortgage-interest deduction for localities that fail to allow sufficient housing construction. The federal tax deduction for state and local taxes could be modified to not apply to any property-tax payer with property assessed at lower than some percentage of the property’s real value.
These proposals do not force the federal government to become directly involved in areas of local policymaking. Instead, they vindicate the federal interest by offering financial benefits or imposing costs—then leaving the states and localities to figure out how to comply.