Inequality and Housing Costs
I have a little list in my head of things I wish academics would public serious research on, and this paper from Enrico Moretti was definitely on that list:
A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications.
Moretti’s takeaway from this is that “the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.” I’m a bit more interested in the implications for housing policy, as this seems to suggest that there’s substantial loss of welfare associated with regulatory limits on the creation of new housing supply in high-wage, high-cost metro areas. Allowing central cities and inner suburbs to become denser could substantially reduce the cost of housing in high-cost metros.
Among other things, doing this would allow more non-graduates to be able to afford to live in the high-wage metros that feature large concentrations of college graduates. Certain skillsets that don’t require college degrees are much more valuable if you practice them near where lots of college graduates live. Hairstylists, plumbers, auto mechanics, etc. can all command a higher wage if they have high-wage neighbors since you wind up with clients who can afford to pay top dollar for their services. That works much better, however, if you can afford to move somewhere where there are lots of high earners. And there would be many more such possibilities if we had some denser patterns of living and construction.
54 Responses to “Inequality and Housing Costs”
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October 4th, 2008 at 11:07 am
Care to share some of the other ideas that are on your little list?
October 4th, 2008 at 11:17 am
1) The difference between living in New York City versus some low-income area in the South comes at retirement — you should live so long.
2) You may not be that much better off during much of your life if you live in New York — because your higher wages will be offset by a much higher cost of living and because you are competing with crooks like hedge fund managers who make much more than you.
3) But when you reach 65, you sell your New York real estate and move to Bumfuck, Arkansas. Where you can live like a minor Lord because your net worth is higher than what your country cousin was able to accumulate during his career in Bumfuck.
4) You are not so well off as your wages would suggest, however. Because the government has extracted much higher taxes from you during your life than it has extracted from your cousin.
5) Meanwhile, two weeks after you move to Bumfuck, you look around then go out ,buy a pistol, and blow your brains out.
6) A week prior to that, your country cousin had asked you why you wasted your life living in a miserable shithole like New York City anyway.
October 4th, 2008 at 11:18 am
Actually, this is what some of my research is about…we completely agree with Matt, of course…
October 4th, 2008 at 11:31 am
Matt’s call for density contradicts both macro demographic trends and human preference. The majority of new businesses are being built outside of the city center (i.e. five mile radius). What we are seeing, largely thanks to technological advancement, is businesses placing less value on having a dense and diverse business environment. Just look at Microsoft with headquarters in Redmond, WA or Google. There is no reason to artificial inflate the importance of cities (as I assume you are advocating) when both businesses and families hate them.
October 4th, 2008 at 11:44 am
Seems to me that “philosopher” is one of those occupations you can add to the list of jobs that don’t require a college degree.
In fact, I would dare to say that there really aren’t ANY occupations that REALLY require a college degree (except maybe medicine).
As the college premium goes down and people realize that college has essentially become a money suck, I think paper education will decline and “real” education (I have apprenticeship in mind) will increase.
Is there any reason why you couldn’t become a lawyer by apprenticeship other than HR departments at firms wont look at you if you haven’t graduated law school?
Is there any reason you couldn’t be a business executive without a degree? No.
October 4th, 2008 at 11:45 am
Okay genius, how do you think this following story will play with Middle America?
Obama is actively recruiting the ex-felon demographic to help him win in swing states. This AP story just out of Virginia:
http://news.yahoo.com/s/ap/20081004/ap_on_el_pr/felons_voting;_ylt=AuIex4Q.IBQu1kBbiiFOrJKs0NUE
October 4th, 2008 at 11:49 am
Just look at Microsoft with headquarters in Redmond, WA or Google.
I’ve never been to Redmond or anywhere near Seattle, but Google’s main campus in Mountain View, CA places it in one of the densest regions of the country. Compare the density of towns 35 miles outside of NYC or Boston vs. what it looks like 35 miles outside of San Francisco, and both the density and real estate expense of living in the latter area is startling. Not to mention Google’s other major locations in Manhattan and Cambridge, MA.
Notably, Google located itself in a dense region of the country between two cities in an expensive metro area, rather than a more distant, less dense, cheaper area like Gilroy or Stockton. Why do you think that is?
October 4th, 2008 at 12:04 pm
Don Williams,
You also forgot that the upper class college graduate in NYC probably did not have any kids so that he will have to pay for every service in his old age whereas the country counsin probably has 2-3 children with at least one living close enough to drive dear old mom and dad to the doctor.
Also, if the NYC dweller had a child, they paid $30K per year for private school so that their child would not become prey in the public schools. Whereas the country counsin sent their children to public schools and public universities for little to know costs. Of course, the country counsins kids probably few up to be teachers, nurses, pharmacists, or accountants who can find jobs in rural/exurb america whereas the NYC dweller kid went into publishing/media/entertainment and must be supported for years in order to also live in NYC.
October 4th, 2008 at 12:05 pm
“As the college premium goes down and people realize that college has essentially become a money suck, I think paper education will decline and “real” education (I have apprenticeship in mind) will increase.”
I seem to recall the Dept. of Labor only saying only about 20% of all U.S. jobs require a college education. So why do we keep hearing plans to send everybody to college?
Teaching people practical job skills would be a lot cheaper and would better serve their job hunting prospects later on.
October 4th, 2008 at 12:08 pm
the NYC dweller kid went into publishing/media/entertainment
If only NYC could become the center of some kind of industry which provided extremely high paying jobs that would draw people there…
October 4th, 2008 at 12:10 pm
Portland, OR has had strict land-use requirements in place for decades, as has the state. The state requires that land designated for farming, e.g., must remain in that category — owners can’t sell the farm to developers to be bucked up into housing lots. In the PDX area, the result has been lift-off for housing prices because the amount of land usable for single-family dwellings is very restricted. The stratospheric pricing results in sprawling burbs wherever land can be found that is not sequestered as farm land or some other restricted usage.
What this policy has not done is resulted in a high-density buildup of condominiums or apartment buildings suitable for families. Singles and childless couples with sufficient incomes populate the core residential areas. Families exit to one of the burbs, many of which now are 40-50 miles away.
Although I would say that any sensible person should be in favor of the land-use planning that has preserved PDX and surrounds from blighting sprawl (and destruction of farm land), I can’t say that it appears to me to be a successful implementation to the extent that families continue to be driven from the core areas. Because, wherever those families alight, strip malls and box stores settle in, as well.
Thanks.
mp
October 4th, 2008 at 12:13 pm
Matt, your tireless advocacy on behalf high density housing was much appreciated during the boom. Now you sound like a broken record. Nobody wants to build more condos right now, because there’s already a massive glut. Zoning doesn’t really matter at this point.
October 4th, 2008 at 12:18 pm
You can’t avoid the housing-costs-are-high-on-the-coasts theme on this blog. On the one hand, it’s High Density Matt just as much as Big Media Matt, and on the other every time Matt discusses raising taxes so-called liberals in the comments wail that taxes must only rise on those with six times the average income, because it’s just so damn expensive for a professional family in Manhattan.
October 4th, 2008 at 12:19 pm
Let me add: I’m still enjoying the fact that the comments system here is not Atlantic-slow.
October 4th, 2008 at 12:22 pm
Although that sidebar which listed who-put-comments-where did make it easier to follow a conversation. Any chance of having a ‘recently commented’ sidebar on this blog?
October 4th, 2008 at 12:31 pm
Tyro,
Are you kidding? Redmond’s density is like 1000 per square mile and Mountain View’s is like 6000 per square mile. Compare that with San Fransico of 17,000. All I am saying is if the businesses are moving away from uber-dense downtowns we shouldn’t be encouraging people to move in. When I lived in Vancouver, thanks to mostly misguided eco-density initiatives, many people would live downtown and commute to the suburbs. Using the government policy for social engineering based on some progressive’s whim is likely to have similarly disastrous consequences.
October 4th, 2008 at 12:44 pm
As some of the comments above indicated, college education itself has become another big bubble. I’d hate to have college age kids right now, in some middle class circles its considered tantamount to child abuse not to send them to college, but current trends are taking things to the point where you might as well build a bonfire with the tuition money for the good it will likley due them.
October 4th, 2008 at 12:51 pm
Gordon, first, people aren’t moving away from uber-dense downtown (if you can find a good deal on some downtown office space that apparently no one wants in SF, I’m sure you can get a fat finder’s fee from someone)– there is a steady stream of interest in downtown real estate. It’s just that interest in commercial real estate is regularly increasing, and those commercial interests have to move somewhere. Next, the fact is that Google chose the locate its headquarters in the substantially dense SF Bay Peninsula, rather than a distant, exurban outlying area without rail access. Furthermore, when Google set up satellite offices in the other coast, it chose locations that fit in to the living patterns of its employees: in this case, transit-served cities.
When I lived in Vancouver, thanks to mostly misguided eco-density initiatives, many people would live downtown and commute to the suburbs.
Actually, the reason they lived downtown and commuted to the suburbs is because they wanted to live downtown because they preferred it. Funny, though, that when people choose to live downtown, you attribute it to government boondoggles, but when companies locate in outlying areas, you claim it’s because “that’s what they want!”
October 4th, 2008 at 12:54 pm
Is there any reason why you couldn’t become a lawyer by apprenticeship other than HR departments at firms wont look at you if you haven’t graduated law school?
Actually, being a lawyer requires writing skills, facility with and understanding of the use of language, and analytical ability which is most often associated with what one gets out of a broad-based university education.
More valid to discuss is that fact that there are a huge number of tasks done by lawyers which do not require the skills of someone who’s been admitted to the bar or even has a college degree. It’s not that lawyers don’t need college degrees. It’s that a large number of the stuff lawyers do is stuff you don’t need a lawyer for.
October 4th, 2008 at 1:18 pm
“As some of the comments above indicated, college education itself has become another big bubble.”
Tuition costs have risen at 2x the inflation rate for years even as wages/salaries stagnated. At some point the earnings advantage of college won’t yield positive returns on the tuition investment.
October 4th, 2008 at 1:29 pm
I think I am going to have to stop reading your blog even though you are third on my blogroll feeds.
You have indicated that one of your career goals is to be able to influence public policy. Judging by your posts the one area you are most passionate about, urban density, is the one on which I disagree with you most.
Really big cities made sense before advances in communications and especially before personal computers the internet. Their outsized influence continues mainly as a relic of the old paradigm. It is their very density and concentration of industries and markets that spawned other policies and/or industries to which you object: factory-farming agribusinesses and their subsidies; suburban and exurban sprawl that resulted from zoning separate areas for residential, mercantile and industrial activities and the ensuing personal transportation nightmare.
Once there was a huge clerical job market that drew modestly educated people to the cities. For every professional there was an army of paper shufflers, secretaries, bookkeepers, runners, postmen, etc. Most of those jobs are gone. Computers replaced hundreds of thousands, if not millions of city workers. Now you want them to come back as service workers? Isn’t that adding insult to injury?
October 4th, 2008 at 1:35 pm
All other things being equal, a house in or near New York costs far more than one in North Dakota, but for someone who wants to live in New York it’s worth far more too. Partly because it puts you closer to better-paying jobs, but especially because there are a lot of things to do in New York.
This is true of scenic areas in the West too, in areas of Colorado, Montana, and Oregon. Prices go up there too, because people want to live there.
In other words, it isn’t just 2br2ba w/d 1700 sq ft pkg +util. Location adds value.
October 4th, 2008 at 1:42 pm
Well Matt isn’t for replicating a hundred Manhattans by regulatory fiat. He’s against replicating a hundred Phoenixes by the opposite kind of regulatory fiat. And he’s right.
It’s not like you have to prohibit single family homes and mandate high rises, either. Just simple little changes, like surrounding commercial zones with medium density apartments instead of plopping commercial islands in an ocean of single family detached homes, would make a huge difference.
October 4th, 2008 at 2:52 pm
At some point the earnings advantage of college won’t yield positive returns on the tuition investment.
We’re already there. In certain professions, there’s already an understanding that tuition loans will never be paid off if you accept the ongoing security of a public-sector job. That’s why the VA, for instance, offers loan forgiveness.
As for gekko: Yahoo opened a 14,000 sq. ft. office in downtown SF. (In part to house the Flickr team, who’d been based in the heart of Vancouver.) Google’s London office is in the middle of the city, as opposed to the half-hour train ride that gets you to Microsoft and Oracle in Reading. Google Zurich is in the middle of the city. There may have long been an assumption that hardcore coders can survive in suburban homogeneity — Mountain View may not be as bad as Sunnyvale, but there’s a lot of fuck-all there — but the Google and Yahoo people also know that they need to retain people who don’t live at their desks.
Isn’t that adding insult to injury?
Not necessarily. The term ’service workers’ is overly broad, and the American vocabulary, for some reason, doesn’t use the term ’skilled trades’ as often as it ought.
October 4th, 2008 at 3:51 pm
Me, I’m just annoyed that he’s equating the rise in income inequality with the rise in education. That’s a right-wing canard, designed to obfuscate the real structural causes of inequality behind something with wide popularity (ie, education).
———
Gekko: You’ve surely been reading the blog long enough to know that the argument is that people “prefer” low density areas only regulations and tax policy tilt the scales. Without zoning restrictions or the massive transfers of wealth represented by our highway funding and mortgage subsidy systems, the equation becomes quite different.
October 4th, 2008 at 3:56 pm
Nobody wants to build more condos right now, because there’s already a massive glut.
They won’t be able to get the prices for them they thought they could in 1978, but in the right metro areas, they still want to build them. I work in environmental review for the City of Los Angeles, and of the 13 environmental impact reports I have sitting on my desk, all but 3 are for some kind of high-density housing, whether condos, apartments, or senior assisted living. Each are for at least 100 dwelling units, and one, just south of downtown, is immediately adjacent to a light rail stop under construction and proposes 1,400 units on about 5 acres. I have three separate projects on three adjacent blocks in Hollywood, all within a quarter mile of a subway stop, that involve residential towers of 20, 38, and 40 stories.
Some of these may have been in the works back when the housing market was stronger, but not a single one of the projects that’s landed on my desk in the past year has been cancelled or scaled back, and I keep getting new ones. I’ve heard that there aren’t many people asking for building permits in the city right now, but that’s for stuff being built right now. The projects I deal with are all long-term and wouldn’t open for about 3 years or so, when who knows what the housing market will look like. Another caveat is that while they may be asking for review on a 40-story tower, they may end up building something substantially smaller.
But the contrast between the housing market here, in the central city — particularly in areas easily accessible to transit — and in the car-oriented, single-family-residential, long-commute Inland Empire couldn’t be more stark. Check out Sullivan’s post with the 9-minute video on “foreclosure alley.” The far-flung exurbs are where nobody wants to build. In the middle of the city, they’re getting more realistic about what prices they can expect, but they still want to build.
October 4th, 2008 at 3:58 pm
ACK! Why the hell did I write “1978?” I meant “2006.” 1978 makes no sense.
October 4th, 2008 at 5:45 pm
In California, you can indeed take the bar exam after a period of apprenticeship. The difficulty arises when you attempt to find an attorney willing to teach and mentor you and the fact you are working for free for four years.
http://articles.latimes.com/2004/oct/10/local/me-apprentice10
October 4th, 2008 at 7:05 pm
Some of the larger companies with offices in the Bay Area (i.e. Google, Apple) are looking for more space within San Francisco because that is where their younger employees want to live. Many also run private transport (shuttle bus) services from SF to their offices in Silicon Valley, which is a real failure of public policy.
October 4th, 2008 at 7:34 pm
Re: Computers replaced hundreds of thousands, if not millions of city workers.
But computers also make possible a whole lot of reporting and analyzing of data that couldn’t be done a generation ago so we have instead an army of data analysts dutifully analyzing and reporting.
October 4th, 2008 at 8:23 pm
Or, you could do the short form- when has a new hi-rise created affordable housing? That’s right- NEVER.
Nor, in fact, is there any evidence that people who build hi-rises are deterred by zoning. If they think they can make money by building, they go to the city council and ask for a re-zone, or go to the building department and ask for a variance.
Matt’s real problem is that he lives in the city owned by the Federal government.
Also, a lot of zoning is intended to prevent the costs associated with not having zoning. Take away the zoning, add the costs, and suddenly the free lunch the free market was supposed to supply ain’t that free any more.
October 4th, 2008 at 8:37 pm
But computers also make possible a whole lot of reporting and analyzing of data that couldn’t be done a generation ago so we have instead an army of data analysts dutifully analyzing and reporting.
Funny. You do know that computers can be programmed to do most of that stuff too, don’t you?
October 4th, 2008 at 9:30 pm
Funny. You do know that computers can be programmed to do most of that stuff too, don’t you?
You mean Yglesias has been replaced by a machine that can just barely pass a Turing test? I sort of figured that, but still unsure of it.
For instance, the fact that he doesn’t think that many plumbers, hairstylists, auto mechanics live in central districts of ‘high cost metro areas’ makes me think he’s been programmed with insufficient data, and like Johnny 5 ‘needs input’. Or maybe he just a dude that needs to get east of the anacostia river once in his life.
October 4th, 2008 at 9:44 pm
Something for JonF and Emma Zahn http://www.economics.harvard.edu/faculty/glaeser/files/disdeath.pdf
October 4th, 2008 at 9:45 pm
Or, you could do the short form- when has a new hi-rise created affordable housing? That’s right- NEVER.
And when has artificially restricting the housing supply created affordable housing? That’s why Santa Barbara is so affordable, right?
October 5th, 2008 at 3:29 am
It’s funny how many people think like serial catowner. It’s as if rich people just magically appear in the city when new luxury housing is built, so the new housing has no effect whatsoever on the actual housing market.
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