Monday, June 10, 2019

Supply and Demand do explain why LA has a housing problem

The most recent homeless counts came in last week, and homelessness in Southern California is getting worse.  As my colleague Gary Painter has shown, this is not because LA "attracts homeless people," which is the view of the data-free opinionaters in the LA Times comments section.

The change in homelessness reflects how very expensive housing is here in LA, particularly as it attracts people with college degrees who outbid lower skilled workers for the housing stock that is here.  Many people without college degrees are leaving LA, but people with strong social or familial ties have reasons not to do so.

So why are things so bad here?  I would argue the problem arises from the fact that LA policymaker "solutions," which include bespoke zoning and some affordable units here and there, do not address the fundamental problem facing the LA housing market--that it has an inelastic supply curve.  As my friend and frequent co-author Steve Malpezzi taught me a long time ago, there is a big policy difference between nudging an inelastic supply curve to the right and making supply more elastic.

We may approximate the state of the LA housing market with the following supply and demand picture.  Albert Saiz showed in 2008 that Metro Los Angeles had the lowest supply elasticity of any American MSA, and given its small levels of construction in the face of large rent increases since then, it is hard to imagine how it has gotten any larger.

Now suppose municipalities relax the constraint on supply through a little up-zoning here and there.  The picture changes to this.

The relaxation of the constraint allows some housing price relief.  But there is a problem.

Housing demand for LA continues to increase, not (any longer) because of in-migration, but because of the age profile of the population.  Large numbers of kids are becoming adults, and, as Sarah Mawhorter shows, want to move out of the parental home (the parents want this too!), but don't want to leave the town where they grew up.

For LA to accommodate housing demand, it would need to have a supply curve that more closely resembles other cities--it would look like this:

The supply curve would still be upward sloping, but changes in demand would also lead to large increases in supply, and hence bring about milder price increases.  Policy can move this relatively elastic demand curve rightward, by reducing the requirements necessary to build (these include things like fees, and in LA's case, linkage fees and parking requirements).

I should note that LAs current vertical supply curve is not the result of topography alone.  In his excellent dissertation at UCLA, Greg Morrow showed that Los Angeles zoning contemplated a city of 10 million; various down-zonings since then have reduced the city's allowable density by 60 percent.  LAs current population of 4 million largely uses up its allowable zoning, and as affluent small households replace less affluent large households (something Hyojung Lee has documented), it will be able to hold even fewer people--unless land use policy is completely overturned.

For those who think LA is overcrowded, let me use Alain Bertaud's work to point out the LA's density is one-third of Krakow's, one-fourth of Paris' and one-fifth of Singapore.   I can testify that these are all very pleasant, livable cities.  If LA were to completely change its land-use policy, it could at once become considerably more affordable and have even more walkable neighborhoods than it currently has.  But incrementalism won't work.

1 comment:

Anonymous said...

So by your argument, the cost of housing in Los Angeles will continue to increase year over year until zoning legislation is passed?