Housing Hunger Games!

Problem: There’s a housing crisis going on! This three-part blog post will walk you through what the evidence says are its causes and solutions. See Parts 2 and 3 here.

Part 1: More Housing, More Problems?

What’s going on?

Housing prices in the US are exploding! The crisis is especially painful in the NYC area, where people generally pay a lot in rent. In 2023, the average rent in NYC rose to $3,500 per month. Over half of NYC residents are officially rent burdened. In 2023, NYC’s residential vacancy rate fell to 1.4%, the lowest rate in over 50 years.

The picture is almost as bleak across the Hudson. In Hudson County, over 40% of residents are rent burdened. Jersey City in particular is the 11th most expensive large city in America, where it costs $2,300 per month on average to rent a home.

OK, that sucks. What’s causing it?

Well, a lot of people want to live in the NYC area. And that’s a good thing! But all those people are fighting over a small number of homes. From 2010-2022, NYC’s housing stock grew 9%, but employment grew by 23%. That means that in the last decade, demand for housing in the area grew about 2.5x more than supply.

The scramble for housing near NYC of course has spread to surrounding areas. In the broader NYC-metro area, for every 10 jobs, there are only 8 homes. So it’s tough out there for renters.

The chart below shows the ratio of new jobs to building permits in various metro areas. It’s not a coincidence that the places with the least affordable housing are the ones with higher job growth/permit ratios.

So, the obvious solution is to build more units to match jobs. Wouldn’t that just lead to gentrification and invite rich people in to take everyone’s homes?

Gentrification displacement generally happens when higher income people move into an area and raise rents so much that the existing population is forced to move out. But displacement doesn’t have to happen! Here’s an example to help think through it:

Let’s say there’s a block with 10 homes historically rented by 10 lower-income residents. Let’s also say that a big new company relocates its office near the block. Let’s say the office has 5 higher-paid employees who now want to relocate near their office. If the supply of units on the block doesn’t increase to match the new number of jobs, the 5 new residents will outbid the existing renters for 5 of the 10 units, driving out half of the old neighborhood.

But if 5 new units are built on the block, the 5 higher-income renters can rent those new units, leaving 10 units for the prior renters, and nobody is forced to leave.

But won’t the old landlords raise rent on the old renters after the new fancy fuckers have moved in and the neighborhood is “nicer”?

Maybe you’re rolling your eyes because you know what happens when the fancy fuckers move into their luxury apartments. Starbucks, Equinox gyms and Affluenza follow, everything gets more expensive and landlords get out of pocket with their rent demands. You’d certainly be right that fancy things coming in can increase rent.

But there’s two reasons not to worry so much about this. First, it’s good that landlords and business owners invest in communities! We want to encourage this investment, including because new units generally mean more valuable properties to pay property tax and support local services (schools, transit, public safety etc). Researchers call this community investment the Amenity Effect.

Beyond the social good that comes with increased local investment, there’s reason to believe that new units can have Amenity Effects while still overall lowering rents (or slowing their increase)–a win for everyone. More below.

I see luxury units going up everywhere. How does building those increase access to affordable units?

If new construction increases amenities, how can it reduce rent? Doesn’t the Amenity Effect embolden asshole landlords to raise rent? To see how this can happen, let’s go back to the example above of our 15 person block. Let’s say a snooty developer comes in and wants to cater exclusively to the 5 higher-income residents. The developer builds a new luxury 5-unit building with an Hermès Sandals Storè on the first floor. The 5 higher-income residents immediately migrate from their buildings to the new luxury building.

In this scenario, rent for the 10 lower-income residents priced out of the new luxury building should go down–even with the new Hermès Sandals Storè. The block has 20 units (the previous 15 units plus the new 5 luxury units) for only 15 total residents. Thus the landlords for the 10 lower-income units face competition from the landlords that own the 5 units that have just been vacated. The landlords of the vacated units must lower their rents to try to poach some of the lower-income residents, or risk losing money on an empty building.

Supply and demand isn’t just abstract economic theory. The data backs it up. An innovative 2019 study looked at 12 large US metro areas and found that for every 100 new units added, within 5 years, over 80 higher-income renters moved out of lower income buildings. This “Migration Chain” of higher-income renters moving to new buildings and leaving their old apartments available for lower income renters is how neighborhoods can both add amenities and lower rents. It’s reverse gentrification!

In summary, if you build enough new units, the Migration Chain Effect will be greater than the Amenities Effect and neighborhoods will improve while lowering rent.

Comrade, shed your finance bro vest! How can you not see the role of landlords in all this?

We discuss those villains in Part 2.

TLDR: If supply goes down, price goes up.

Part 2 walks you through landlords’ role in all this.