Addenda to On the supply-side housing theory

Plus: a new episode of Messing with Maps

🏠 Real Estate Room 🤑 

Last week’s dispatch on supply-side housing theory really drew a response, and some of those responses stirred up all kinds of new thoughts in my aging brain and so, at the risk of boring you all with a bit of redundancy, I figured I’d use this opportunity to add a bit more to the conversation.

As I said before, I’m not arguing that the laws of supply and demand don’t apply to housing at all. They certainly do — it’s simply that they apply more forcefully in some cases than in others, meaning that trying to leverage supply to reduce prices is more effective in some cases than others. I dug up two real-world examples to illustrate the different types of housing markets.

🛢️ The Oil Boomtown, where the housing market follows the laws of supply and demand to a tee

A couple of decades ago, Williston, North Dakota, an agricultural and depleted oil town, was losing population, with just 12,512 residents in 2000 (about the same as in 1960). The housing market was so unremarkable that finding pre 2006 data is difficult to come by. 

Then horizontal drilling and multi-stage hydraulic fracturing were combined to extract oil from the Bakken Shale, and the boom was on: Between 2006 and 2014 Williston’s population more than doubled as people moved in to work on the rigs and associated industries. The existing housing inventory — along with every RV space in the region — was filled up, prompting folks to rent out garages, sheds, and so forth. Housing costs rose to some of the highest in the nation — $4,000 or more to rent a 3 BR apt. — rivaling even those in Manhattan and San Francisco. And that prompted a building boom. Between 2008 and 2013, more than 5,500 multifamily housing units and more than 4,000 single family homes were permitted in the area; prior to the boom only about 100 building permits were issued annually. 

But then, just as supply was beginning to catch up with demand and prices were stabilizing, oil prices crashed, busting the boom. The jobs on the rigs dried up, and the workers — having no reason to stay — bailed. Housing demand, and prices, plummeted. 

In recent years some of the oil jobs came back, but the population is still on the decline, along with demand for housing. Now you can buy a house for less than $200,000 and have your choice of a fairly new 2 bedroom apartment for $900 or less (which is still far higher, even adjusting for inflation, than pre-boom prices). 

The reason Williston followed the laws of supply and demand is because the demand was driven by a concrete factor — jobs. Demand was also limited by the number of jobs available: Once they were all filled, demand would stop increasing. And the amount people can fork out for housing is also limited to a portion of those jobs’ wages: Even during the height of the boom and the deepest housing scarcity, $1-million homes were rare to nonexistent (and now there are only a handful of homes on the market listed for over $500,000, most of which come with acreage). Because demand had a finite limit, it could be balanced out by adding a finite amount of supply. 

The Western amenities town, where the laws of supply and demand are distorted

But demand in Durango or Moab, Telluride or Boulder, Tahoe or Bend, is not driven by concrete factors like local jobs. Nor are the prices folks are willing to pay limited by the salaries those local jobs pay. Demand in these cases is driven by a certain cachet of Place, or a desire to live (or own property) there. There is no concrete limit to this kind of desire unless, say, you put a toxic waste dump in the town square. Same goes with prices, which are driven not solely by scarcity (though that may have an effect), but by how much wealthy folks are willing to pay to satisfy their desires — which, apparently, is unlimited. 

This dynamic is playing out right now in Teton County, Wyoming, where even the millionaires are being displaced by billionaires. Here’s what the Viehman Group says in their Jackson Hole mid-year real estate report:

While the overall number of sales is down 32%, inventory levels across the board are on the rise. Overall inventory is up 34% with single-family home inventory up 13%, townhome/condo inventory up 44%, and residential vacant lot inventory up 76%. Normally, rising inventory puts pressure on Sellers to lower their prices, but not in 2023. The average and median sale prices for homes, townhome/condos, and residential vacant lots are all up and all breaking records for the end of Q2.

In Jackson, supply — i.e. inventory — is going up. So are prices.

These two examples show that in Williston-like places you can bring housing prices down simply by building more market-rate houses, but that in Jackson-like places it’s far more complicated than that. 

And stating that does not, for the record, make me a NIMBY. Quite to the contrary: I’m a YIMBY all the way, at least when it comes to building more affordable housing. Single-family zoning should be done away with; mixed-use, density, and infill development should be encouraged; and permitting should be streamlined for truly affordable (i.e. deed-restricted or rent-controlled) housing — but not for huge developments that include just a couple token affordable units. Innovative approaches, such as tiny home villages and co-housing, should be encouraged. Mobile home parks should be kept intact, as they can be a solution to the housing affordability problem. 

And all of this should be done close to where the jobs are, not out in the fringes, not in some “bedroom” community from which workers must commute ungodly distances — and fork out high transportation costs — to get to their marginal-wage jobs. That will be better for everyone and create stronger, more diverse communities.

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🔨 How about those building permits? 🏗️

Okay, but what is going on with supply in some of these overheated housing markets? To hear it from the supply-side housing folks, you’d think that there was nothing being built at all, and that restrictive regulations and NIMBY insurgents were blocking any new housing from even getting permitted.

Source: U.S. Census Bureau

The data show that some permits are being issued, including for nearly 50,000 units in Phoenix. I mean, you know, they’ve got plenty of water, right? The good news is, even in smaller metros, developers are adding a fair amount of multi-family structures. Will that help stabilize prices? It hasn’t yet, but I guess we’ll see.

Source: Redfin.

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And now for a kind of mind-blowing data point:

$449,112: The average per-unit development cost in Colorado for housing supported by housing tax credits — i.e. affordable housing. Umm… yikes.

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And, at last, today’s …

🗺️ Messing with Maps 🌏

I stumbled upon this beauty on the very cool David Rumsey Map Collection. If you’re into maps, and you haven’t checked it out yet, go there now! Anyway, this shows the Colorado River Aqueduct as it was being constructed in 1935. I don’t really have much more to say about it except to note how nicely “contained” Los Angeles was back then, and the relatively sparse development in the rest of Southern California. You may have to view this one on the Land Desk website to really get a sense of it.

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