Keep it Simple: Housing Supply and Demand
If you are a fan of The Office, you remember the advice that Michael Scott gave to Dwight Schrute when it came to closing a deal? Michael told Dwight to “K.I.S.S.; Keep It Simple Stupid.” Michael Scott certainly wasn’t the sharpest tool in the shed, but he was on to something when he realized the best ways to accomplish a task usually involved the simplest methods. This acronym, silly as it may be, is a cousin to another principle dating back over 200 years ago. The 19th century metaphysician Sir William Hamilton is credited with coining the term Occam’s Razor. Like the K.I.S.S. acronym, Occam’s Razor promotes simplicity over complexity. It is the principle that in the absence of certainty, the simplest hypothesis or the hypothesis with the fewest assumptions ought to be selected.
When it comes to housing, the good news is that are some simple answers. Slate‘s Reihan Salam recently wrote about San Francisco’s housing affordability conundrum (to put it lightly), tying astronomical prices to San Francisco’s stagnant housing supply in the face of incredibly high demand. Take it away, Mr. Salam:
Perhaps you believe, as many otherwise intelligent people do, that the law of supply and demand is somehow inapplicable to the housing market. Consider the following. While San Francisco’s housing stock grew by 8.8 percent between 2000 and 2010, for an average annual growth rate just under 0.9 percent, the average annual growth rate of the housing stock in inner Tokyo was 2 percent. The shocking result is that while rents have been rising rapidly in San Francisco, they’ve been falling, albeit slightly, in Tokyo.
Any traded good (like housing) exists in a market; in a free market, the price of that good is set by the demand from consumers for that good, as well as the supply of that good. If demand goes up and supply is held constant, the price of the good goes up. If the supply stays constant but demand drops (how many VHS’s could you buy today if you walked into a thrift store with $10?) then cost drops. If demand goes up and supply increases to keep pace with demand, costs will likely remain steady.
This principle applies to housing costs. It just does. And yet, many people remain skeptical that this relationship exists. I am not sure why this is the case, though I suspect it may have something to do with the inherent simplicity of the supply/demand relationship.
The housing issue is complex, so the answer for housing affordability must be complex! It couldn’t possibly be explained by such a simple concept! In point of fact, the housing issue is complex. An individual making 60% or less of the AMI may not be able to rely on the market to produce affordable housing. Government intervention is a part of the answer, including the housing levy and targeted subsidies for construction and tax abatement. But at the end of the day, unless we are ready to accept major tax hikes, the government will never have the capital to build enough affordable housing to actually make a dent in housing prices. The bulk of the solution will be market-driven.
This discussion is, of course, relevant to Seattle. Anyone looking for a new apartment or considering purchasing a home in Seattle right now is acutely aware of how crazy the market is. Seattle rents jumped 4.1% in the second quarter of 2014 alone. “But,” you ask, “isn’t Seattle going through a construction boom?” Yes, it is. But remember, supply is only half of the equation.
The fact is, demand for Seattle living has not just matched supply, it’s blown past it. This explains the faulty logic by those who claim all the new, expensive apartments are driving prices up. They’re simply correlating what they see: Lots of construction and price increase all at once. In point of fact, the construction boom is the only thing keeping housing prices from spinning off into their own San Francisco-like universe.
Both cities are highly attractive places where lots and lots of people want to live (read: demand). Yet neither is willing to sacrifice an ounce of “character” or “view protection” to allow enough new housing to meet that demand (read: supply). Even still, San Francisco, a city with 200,000 more people than Seattle, is building less new housing than we are. Is it any wonder they are, as Reihan Salam puts it, “America’s largest gated community”?
Seattle is currently on the same path, making similar mistakes San Francisco made decades ago. But it is not too late for a course correction. With the right policies in place, we can remain an incredibly vibrant, attractive city and provide housing at more reasonable prices for our citizens. I, for one, am grateful for Seattle’s growth and its attractiveness to the country and the world. Let’s celebrate that we don’t have a shrinking population like Cleveland and Detroit. And let’s work hard to be more welcoming to the newcomers who bring life, wealth and culture to our communities.