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2006/07/17
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Trickle Down Follow-up...
First, I'd like to say "Welcome!" to my new domain/website, PoliticalSuicide.org. It was born out of my frustration with most of the current political websites pretty much covering just one extreme side or the other of the political issues of the day. I've got some pretty good ideas that I hope to launch here for furthering the political discussion (and to keep me out of trouble... :) so please bear with me as I hope to start launching the new features as soon as I complete them (I'm teaching myself Python along the way)...
Anyway, a few weeks ago, I went out on a limb and against conventional wisdom to explain why I felt the "trickle down" theory just wasn't going to help with lowering property prices in Austin anytime soon. The background of my post in a nutshell (as I heard from more than a few people that it was a bit on the long side... Glenn Greenwald is my h-e-e-r-o... ;) would be that a commenter left a comment on my blog saying that "trickle down" worked "like gangbusters" in the real estate market, to which I felt the statement was a bit odd. After reading articles, opinions, comments and talking to friends I trusted and people in the business, I put forth the following thesis:
"The vehicle that M1EK is using for this argument is now called supply-side economics. In his example, by adding more supply to the market, no matter what the price, it will eventually bring lower prices long-term to the whole market, not just the luxury segment where the current supply is being increased. While that may be true in general terms, I'll put forth that the supply isn't the greatest determining factor in this "affordable housing" scenario; I feel the demand in this limited market segment will be the more important quality as that will drive up the existing outlying property prices and will not, as M1EK asserts, increase affordability for the general public. Below, I hope to show that while in theory, M1EK's premise is generally correct for most things, there's not enough places (or plans) to build the sheer number of condominiums needed to make his assertion true in this case."I then followed that thesis with a few examples (a parking lot and a Ferrari / Camry metaphor) and links to authoritative sources to explain how I got there. So, a few days ago, a reader emails me the following article from the Austin Business Journal (h/t Clayton) in which Austin's current downtown city planner, Michael Knox, makes a statement that nearly perfectly matches what I wrote in my post:
"But with so little space left, demand may end up forcing development into adjoining areas, perhaps along Shoal Creek on the west side or along Waller Creek to the east. "That's going to cause a lot of friction when you start talking to these abutting neighborhoods," he says."Now I know that Mr. Knox is talking about demand for developable property and not the demand for actual completed residential units but the demand for land is complimentary to and actually bolsters my thesis by bringing yet another "X-factor" to the housing supply market that will increase prices. Currently, the Mayor and Council want to move 20,000 more people into the downtown area over the next few years. But as I mentioned in my post, there aren't currently enough places for these people to move so demand will force these people into looking for the most desirable property left on the market. If these more affluent buyers don't want to live in the "Hills" on the periphery of town or out at the lake (as they are looking for properties $300k+), they will undoubtably will be looking in the adjoining neighborhoods (Barton Hills, Clarksville, etc), which increases the demand for the available homes on the market. From the Austin Real Estate Blog (my emphasis):
Austin Residential Home Sales continue to be very strong. The number of homes sold increased 21% from 2,462 last June to 2,980 June 2006. At the same time, the number of active listings fell 2% from 8,637 to 8,477. The number of Pending Sales in June is up 31% from a year ago, from 2,506 to 3,286. This continued increase in demand along with reduced inventory is driving healthy value appreciation despite rising interest rates. Average Sales Price is up 12% from a year ago, from $219,196 in June 2005 to $245,655 June 2006.Now, maybe M1EK can see the "depressing influence on the rent I can get for it [his Clarksville condo] thanks to the indirect influence of those downtown units," but I'm not seeing that "trickle down" effect from those downtown condos in these numbers... Maybe I'm not squinting hard enough... Now add the "X-factor" of developers looking to "spill out" into the peripheral neighborhoods where they will be competing for the more affordable tracts of land (with homes or not already on them) as well as the resulting rise in property values as the downtown luxury units are completed. This scenario is much like the Turtle Creek area of Dallas (hehe, where I also lived in an 24-story condo tower for awhile. But I'll save those stories for another time [I can hear that sigh of relief from here...] :) In Mr. Knox's statement about needing more residential space downtown, he said there wasn't going to be enough property that could be developed to house all those future residents and the demand for that property would have to spread into the outlying neighborhoods to accomodate the Mayor's goal. So, in that scenario, we now have 2 sources of demand in the adjoining neighborhoods:
Median Sales Price is up 8% from a year ago from $168,500 to $182,000 (a new Austin record high)
note: the graph below has the wrong median amount on the chart, it’s $168,500 not $165,800.
- demand from developers for the limited developable land in the adjoining neighborhoods (see quote above)
- the influx of residents (both from Austin and recently arrived) that would like to live downtown but there are no units available downtown because of the high demand
"It's clear that demand is high for units. One need only look at projects like The Shore, a 22-story residential tower that recently broke ground with 80 percent of its units already committed. And more than a dozen other projects are already in the works."
Photograph: It's the sign facing the Town Lake Hike/Bike trail at the Milago luxury condominiums. I think the graffiti artist captured a sentiment held by many others here in Austin.
Correction: Wikipedia's John Kenneth Galbraith's quote for trickle down is incorrect so I updated it (I had "If you feed enough oats to the horse, the sparrow will survive on the highway." and replaced it with "if you feed enough oats to the horse, some will pass through to feed the sparrows."). It's the only link I can find that actually cites the book.
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9.11.2006!
The Best Olbermann Special Comment Yet
While some of your points are valid, I'm finding you're argument far too complicated and a bit short-sighted. You're wanting to see the effects of increased housing now, while M1EK is looking at this on a 10, 20, 30 year time line. The reason that you're not seeing a trickle down effect is that developers have only started building large numbers of condo properties in the past few years. Prices are high (downtown and in adjoining areas) because demand outpaces supply. If supply can come closer to meeting demand, a condo built in 2006 will more affordable than a condo built in 2026.
I don't think M1EK was asserting that downtown housing will lower prices across the city, just the core. Prices are high in the urban core because supply doesn't meet demand. The only way to get prices to go down is to attempt to increase supply in the core. And we're talking about mitigating high housing prices here. Land in central Austin is more expensive than land in the suburbs. Housing will always be more expensive downtown and in adjacent neighborhoods. But housing costs will be even higher if we don't build downtown.
Actually, M1EK was the one that framed this debate in both the comments he left on your site and the comments he left on mine (the key being the one phrase I highlighted in both of my posts and from your blog):
<blockquote>
<i>"I own a moderate condo unit near (not in) downtown and I can tell you that it's fairly easy to observe a depressing influence on the rent I can get for it thanks to the indirect influence of those downtown units."</i>
</blockquote>
The comments he left on my blog are:
<blockquote>
<i>"The condo I own in Clarksville is one of those (currently appraised at 150K-ish; bought for 92K - both numbers are irrelevant; what matters is that the rent dropped from $1200 four years ago to $1050 the next year and hasn't made it back up to $1200 yet)."</i>
</blockquote>
and
<blockquote>
<i>My condo in Clarksville, for instance, saw its rent drop a couple years ago and still hasn't recovered - partially due to the dramatic increase in supply of downtown housing taking pressure off the nearby midrange stock)."</i>
</blockquote>
All of these quotes are referencing today's market, not 10 or 20 years down the road. I agree with both of you that we need to build and get some density downtown. I also agree with you both that eventually, over time, adding more housing stock will bring affordability down over the long term (probably through some economic bust I would think). I took issue with M1EK because he wrote, in no less than 3 times on 2 different blogs, that he was seeing direct influences on *today's* market from the currently built / building / planned housing stock. I was ok with not responding to his comments on my blog but when I saw him make the exact same comments on your blog with the "<i>fairly easy to observe</i>" qualifier, I had to say something.
And it's a bit out of context that I'm looking for affordability in the market today (you can blame me for that as I really didn't make the distinction well in the 2 posts). Yes, I would like to see some properties built that would promote middle-class ownership (after all, if I really wanted to live with just rich, white guys, why did I move from McKinney Ave. in Dallas? Rich, white guys trundling along in their BMWs and Ferraris at each and every intersection (although, truth be told and in the spirit of full disclosure, by that measure because I drive a Jaguar, I guess I could be considered part of the problem... :). I'm really not worried about housing prices in the near term (even though in these last few posts I spent quite a bit of time trying to debunk a very loud and sometimes obnoxious compatriot). I am really more concerned with losing the cultural and economic diversity of this town. So if we can promote that diversity by adding a few units in the central core at about $1400/mo, I think we should do it for the overall health of the city. If we could do it your way, so to speak, I'm even more in support of it... :)
Just please remember that what started this was a comment by someone which I found interesting. I knew he would take it the wrong way so I really tried to mind my P's and Q's and follow everything I put out there with the facts as best I could find them. For me, my style of writing has always been a bit on the conversational side so sometimes my main points might get a bit lost (anyway, isn't that what blogging is about?) but I still stand behind the posts as my best attempt to explain a very complex situation.
Thanks for reading and leaving your comment. I'm an avid reader of your blog as well but I've been keeping off the comment button there. I don't want to inflame a certain somebody again until it's justified... :)
<b>Update:</b> Hehe, go figure. Updating a comment! Geez, I'm pathetic... Anyway, I think that maybe M1EK has been mixing his message a bit since this topic first started which might be the reason why there's a bit of confusion when speaking about market time frames. I went back and noticed that he added to his post that was trackbacked from mine (without an appropriate update attribution, mind you), so while the conversation has been evolving, it very well could be that he started referencing today's market and then started making more comments about future markets while I stayed on just today's market frame. I'm not planning on making any more posts about this subject so maybe M1EK and I can just move on to the next debate topic (or not as I don't think either one of us reads the other's blog anymore). Thanks again for reading!