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The Terminal Tower complex of Cleveland, Ohio. (Photo: Lisa Chamberlain/Wikimedia Commons)

Turning Real Estate Market Fundamentals on Their Head

• May 27, 2014 • 5:25 AM

The Terminal Tower complex of Cleveland, Ohio. (Photo: Lisa Chamberlain/Wikimedia Commons)

Superstar cities and the spread of gentrification.

On one side of the gentrification problem, we have a paucity of housing supply. On the other side, we see increasing demand. I labor to detail gentrification from the demand side of the equation. Daniel Kay Hertz takes me to task for misstating the results of a real estate market analysis laboring to detail gentrification from the supply side of the equation:

If the problem weren’t related to “demand for housing outstripping supply,” new construction wouldn’t matter. But here the authors are telling us, very straightforwardly, that the solution is to “[grow] the quantity of houses.” In other words, allow supply to match demand. Maybe what’s confusing is Jim’s equation of “strong population growth” with “strong demand for housing.” In a place where zoning allows new construction, those two things are the same. But where zoning makes building new homes illegal, you will, in fact, see prices go up without any increase in population. But that’s not because demand has stayed the same: it’s because there are literally no places to put the extra people. If a neighborhood has, say, 50 people for 50 apartments, and then all of a sudden 50 richer people come looking for an apartment in that neighborhood, they’ll offer the landlords more money and the original 50 people will probably have to leave. Population hasn’t changed, but demand has: there are now 100 people who’d like to live there, even though only 50 can.

The analysis in question is “Superstar Cities.” I don’t dispute Hertz’s bibliographic history of this kind of research. It’s supply side obsessed. Liberalizing zoning, making construction easier, should help ease the pressure of gentrification. But that’s not why the authors wrote the paper. The authors tell us, very straightforwardly, why their work is interesting:

In this paper, we provide evidence that these patterns of spatial dispersion in house price and income growth are related: they are the inevitable result of increasing scarcity of land in certain metropolitan areas and towns, combined with a growing number of high income families nationally. In places that are desirable but have low rates of new housing construction, families with high incomes or strong preferences for that location outbid lower willingness-to-pay families for scarce housing, driving up the price of the underlying land. As the number of high income families grows nationally, existing residents are outbid by even higher-income families, raising the price of land yet further.

Emphasis added. What defines the geographic variance in this case is the quality of demand, not the restriction of supply. Lots of places have some sort of constraint on housing. Few of those places qualify as “superstar.” Furthermore, a superstar city has more pedestrian neighborhoods than global ones. Within a metro, quality of supply matters, too. The pressure valve of neighborhoods overwhelmed with disinvestment and vacancy doesn’t figure into the equation. I cited academic research that adds to the literature about the real estate market problems caused by limited (by whatever means) supply. I highlighted the parts of the paper that spoke to the exceptional nature of demand for housing. Cleveland could have a superstar neighborhood surrounded by a sea of distressed neighborhoods with ample supply. The city and the metro are drowning in vacant houses. The population in city and metro is in decline. Northeast Ohio has a gentrification problem.

Jim Russell
Jim Russell is a geographer studying the relationship between migration and economic development.

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