Why cities are unaffordable

On Atlantic Cities, Nate Berg reports that an analysis by Wendell Cox and Hugh Pavletich for Demographia on affordable housing is incomplete. I would go further and say that the analysis is flat-out wrong.

The top five most affordable major markets in the US, with the ratio between median housing price and income in parenthesis, are Detroit (1.4), Atlanta (1.9), Phoenix (2.2), Cincinnati (2.4), and Cleveland (2.4), according to the Demographia analysis.

The most expensive cities for housing, with the highest house-price-to-income ratio, are listed as San Jose (6.9), San Francisco (6.7), San Diego (6.1), New York (6.1), Los Angeles (5.7) and Boston (5.3).

What's the difference between the two lists? Most of the least expensive places are severely distressed (e.g. Detroit, Cleveland), or were epicenters of the housing collapse (e.g. Phoenix, Atlanta). As Berg points out, the cities at the top of the most expensive list have strong job opportunities and appeal. Moreover, they are denizens of the "top 1 percent" — especially New York, with its finance industry, and San Francisco and San Jose, with connections to Silicon Valley — who bid the prices up high.

The most effective way to make a city more affordable would be to make it less appealing, a quandry that Demographia fails to acknowledge.

Furthermore, the report's subjective grouping of cities into "more restrictive" and "less restrictive" categories makes no coherent distinction between regulations that serve the larger good and those that do not. Land use regulations are necessary for the market to function effectively, because investors need confidence that their money will not be wasted when landowners construct buildings nearby that damage the community. The right kinds of regulations give them that assurance — while avoiding useless restrictions — and spur economic activity. 

There are dumb regulations — such as those that require low-value, automobile-dependent development in most municipalities, even when such development is not the choice of the market. But there are also smart regulations — such as those that encourage high-value, sustainable development.

The key is to know the difference between which regulations are dumb and which are smart, and to move toward the latter. Of course, doing so will make the city or town more appealing and likely raise housing costs.

That connection between appeal and higher costs can be mitigated in at least two ways, aside from direct subsidies for affordable housing. One idea is to recognize that the most important barrier to new development is not regulations per se, but the speed at which the regulatory process moves. That crucial distinction is competely missed by Demographia. Most US municipalties rely on the same regulatory tools — but move through the process at greatly varied speeds. Some cities and towns allow endless delays and appeals — raising costs for development and keeping a lid on supply.

One strategy a city or town can employ to promote affordable, sustainable development is to align land use regulations with what citizens want, and then speed up the process for developers who meet those criteria.

A second strategy is to tie land-use with transportation, particularly public transit. Walkable, mixed-use development with access to public transit lowers household transportation costs, which are nearly as large a line item as mortgage payments or rent. Some development — sprawl in particular — tends to raise family transportation expenditures substantially. Other development — the mixed-use, transit-oriented kind — lowers these costs.

There are many flaws in the analysis of Cox and Pevletich. They don't take into account rental rates, for example, so the report is skewed by only looking at homeownership costs. They ignore transportation costs. They wrongly attribute the effects of economics and community appeal to regulation.

But most of all, their call for more affordability through less restrictive regulations is simple-minded. Cities and towns would do better to focus on more effective regulations and find ways to make them as streamlined as possible.