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In a recent interview with the new leader of America’s second-largest city, Los Angeles Times reporters Liam Dillon and Ben Oreskes ran through a “lightning round” of statements that Mayor Karen Bass was supposed to declare true or false. It led to this exchange:
Dillon: The construction of market-rate homes in disadvantaged areas does not cause gentrification or displacement, but instead prevents it.
Bass: That’s false. That’s completely false. I’m sorry.
Oreskes: Say more about that.
Bass: Well, I mean, the area that I lived in until a few weeks ago in south L.A., there is no question of market-rate housing. People who paid $150,000 for their homes, if you put a market-rate house next door, it’s going to be close to $1 million.
What Bass says at the end rings true. The value of a “typical” single-family house in Los Angeles is just more than $1 million, estimates Zillow. In the neighborhood of Baldwin Hills, where she used to live, it appears to be a bit higher than that. Build a new market-rate single-family house there, and her estimate of a $1 million price tag seems conservative.
But remember, existing houses in the neighborhood are already worth more than $1 million. Cruising around Baldwin Hills on Zillow, I found a vintage 1964 home for which the previous owner appeared to have paid less than $80,000, well cared for but showing no sign of renovation, on sale for $1.2 million. Another that was built in 1947 and sold for just more than $1 million in 2021, for which the previous owner (who may have been the original owner) probably paid less than $40,000, is now on the market for $1.9 million after a renovation.
So yes, something has caused housing prices to skyrocket in Bass’s old neighborhood. It surely isn’t the construction of market-rate homes, though — the Census Bureau estimates that the number of new housing units built since 2010 in the census tract that covers most of Baldwin Hills is zero.
That’s not to say putting up a few new houses in the neighborhood would suddenly make it more affordable. Given the way things are going in Baldwin Hills, they’d probably be fancier than existing houses and sell for even more. But that would mainly be an effect of rising prices in the area, not a cause. Reams of recent economic research — not to mention simple supply-and-demand logic — indicate that building a lot of new market-rate housing all over the Los Angeles area would almost certainly put downward pressure on regional prices and that building market-rate apartment buildings in or near Baldwin Hills would probably have the same effect there. (Links to this research are included at the end of this column.)
Bass’s apparent belief that the opposite is true turns out to be widely held. In a working paper released in November, three scholars from three different University of California campuses reported public-opinion-survey results showing that “about 30%-40% of Americans believe, contrary to basic economic theory and robust empirical evidence, that a large, exogenous increase in their region’s housing stock would cause rents and home prices to rise.” (Italics theirs.) A similar percentage believed that such an increase would cause rents and prices to fall, with the balance predicting no change.
Political scientists Clayton Nall of UC Santa Barbara and Stan Oklobdzija of UC Riverside and law professor Chris Elmendorf of UC Davis instructed their survey-takers to ask a lot of questions testing the bounds of this “supply skepticism” and the reasons for it, and found that it is mostly a sincerely held belief (i.e. not motivated by personal economic interest) and “is not just a manifestation of general economic ignorance.”
We show that the public understands the implications of supply and demand in markets for agricultural commodities, for labor, and even for cars, a durable consumer good that, like housing, trades in new and second-hand markets. There is also overwhelming agreement about how home prices and rents are locally affected by changes in neighborhood quality, by in-migration of rich people, by expansions of employment, by demolition of affordable homes, by new construction of expensive housing next door to more affordable homes, and (perhaps more questionably) by corporate ownership.
Why then are so many people apparently so obtuse about the effects of housing construction? Probably because, in the personal experience of those who live in expensive cities and suburbs, new construction is so often accompanied by rising prices. Since 2015, for example, Los Angeles has built new housing at a pace not seen in decades, and purchase prices are up 68% and rents up 44% (both, again, according to Zillow).
The city is catching up after years of apparent underbuilding (from 1990 to 2014, Los Angeles authorized the construction of about a third as many housing units, relative to population, as the rest of the country), and prices and rents have risen even faster since 2015 nationwide (82% and 48%). But it’s totally understandable that Angelenos such as Bass would associate new construction with rising prices.
Exposure to research findings that point in the opposite direction can sometimes change minds. After arguing on Twitter in September that “building market rate housing doesn’t create affordability” and getting a lot of blowback, State Senator Jabari Brisport of Brooklyn had a chat with some researchers at New York University’s Furman Center for Real Estate and Urban Policy and reported that “it is now clear to me that the construction of market rate housing does not raise nearby rents.”
Brisport, a Democratic Socialist, added that research on New York didn’t show those rents falling, either (they simply rose more slowly), and that he remained focused on eviction protections and housing that’s “socially controlled by the people.” In expensive cities with huge income disparities such as New York and Los Angeles, even much-cheaper market-rate housing would still be too expensive for many residents. Building more such housing isn’t a panacea. It’s just generally not what causes housing prices to rise, and thinking that it is can lead to extremely counterproductive policy choices.
So here, for Mayor Bass and anyone else who might be interested, is a selection of recent research on the effects of new housing construction. I’ve linked to paywall-free versions of all the papers and also to the harder-to-get-at published version if available. The city and regional studies almost all find salutary effects; the neighborhood findings are more mixed but still mostly positive.
Citywide or regional impact
Cristina Bratu, Oskari Harjunen and Tuukka Saarimaa, “City-wide Effects of New Housing Supply: Evidence from Moving Chains,” 2023
James Hansen and Alicia N. Rambaldi, “How Do Homes Transfer Across The Income Distribution? The Role of Supply Constraints,” 2022
Andreas Mense, “The Impact of New Housing Supply on the Distribution of Rents,” 2020
Raven Molloy, Charles G. Nathanson and Andrew Paciorek, “Housing Supply and Affordability: Evidence from Rents, Housing Consumption and Household Location,” 2020 (published version, 2022)
Evan Mast, “The Effect of New Market-Rate Housing Construction on the Low-Income Housing Market,” 2019 (published version, 2021)
Andrés Rodríguez-Pose and Michael Storper, “Housing, urban growth and inequalities: The limits to deregulation and upzoning in reducing economic and spatial inequality,” 2019 (published version, 2019)
Vicki Been, Ingrid Gould Ellen and Katherine O’Regan, “Supply Skepticism: Housing Supply and Affordability,” 2018 (published version, 2018)
Edward Glaeser and Joseph Gyourko, “The Economic Implications of Housing Supply,” 2018
Divya Singh and Luis Baldomero-Quintana, “New Residential Investment and Gentrification,” 2022
Kate Pennington, “Does Building New Housing Cause Displacement? The Supply and Demand Effects of Construction in San Francisco,” 2021
Brian J. Asquith, Evan Mast and Davin Reed, “Supply Shock Versus Demand Shock: The Local Effects of New Housing in Low-Income Areas,” 2020 (published version, 2023)
Anthony Damiano and Chris Frenier, “Build Baby Build? Housing Submarkets and Effects of New Construction on Existing Rents,” 2020
Xiaodi Li, “Do New Housing Units in Your Backyard Raise Your Rents?” (the paper that changed Jabari Brisport’s mind), 2019 (published version, 2021)
More From Bloomberg Opinion:
• Homebuilders Are Signaling Buyers to Wait: Conor Sen
• The US Needs to Build to Solve Its Housing Crisis: Editorial
• Waiting for Home Prices to Drop? Bad Strategy: Alexis Leondis
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. A former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is author of “The Myth of the Rational Market.”
More stories like this are available on bloomberg.com/opinion
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