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DC added record housing in 2015. That's slowing down price increases.

In 2015, DC permitted more new housing units—4,956, to be exact—than in any year since the Census started keeping track in 1980. This pace of housing growth compares favorably to other cities, and there's reason to believe it's helping to slow rent increases.


Photo by Ryan McKnight on Flickr.

The record-setting year is most likely due to both long-term factors (a shift towards city-living among young professionals) and short-term, cyclical ones (federal government job growth having recovered from the sequester).

The composition of 2015's housing permits in DC skewed heavily towards large multifamily buildings, as it has in recent years. Neighborhoods like Navy Yard and Southwest Waterfront, where there are fewer neighbors to oppose large development projects, are contributing strongly to the city's overall housing production.


Graph by the author, with data from the Census Bureau.

Accounting for population, DC got more permits than most other major coastal cities

How does DC's year stack up against other cities? Well, it's somewhat difficult to compare these numbers across cities for a few reasons:

  • Initial population matters. For example, 10,000 new units in one year would be a ton for DC, but very few for a bigger city like New York.
  • Population growth matters too. Baltimore has about the same number of people as DC, but there's little reason to build new houses if few people are moving to town.
  • Cities have arbitrary political boundaries. We could use a standardized geographic unit (like MSAs), but that captures a lot of single-family, sprawling development. At the end of the day, we're interested in the extent to which cities are allowing their cores to densify.
But we can still make some back-of-the-envelope calculations. One useful starting place is to scale permits by a city's population. In 2015, DC permitted 7.5 housing units per 1,000 residents.

That matches or exceeds the rates of most comparable coastal cities: Boston (also 7.5), Portland (7.1), New York (6.6, an outlier driven by regulatory uncertainly for the usually low-growth city), San Diego (4.5), San Francisco (4.3), and Los Angeles (4.1). It easily surpassed cities with lower-than-average job growth, like Philadelphia (2.4) and Chicago (2.1). And DC was out-produced by growth-happy Seattle (17.0), Denver (12.0), and Austin (11.0).

There's evidence that all this new supply is slowing rent growth

In recent years, real estate analysts have noted that DC's higher pace of building has led to rents that are slowing in growth, or even declining. This effect is especially seen at the higher end of the market, since most new construction is luxury.

Here's Multifamily Executive covering a new Yardi Matrix report:

The cities that had the smallest rent gains in 2015 were Richmond, Va.; Washington, D.C.; and Baltimore. Echoing other reports, Yardi says Washington's rent gains have been held back because of the large amount of new supply in its market, while Baltimore still lacks job growth. These cities can expect to see similar results in 2016, Yardi says.
A Bloomberg reporter who interviewed DC developers last summer collected relevant anecdotes:
Tepid job gains and a spate of construction that created almost 20,000 units in the past two years made Washington one of the worst markets for US landlords, forcing owners to grant tenants concessions such as months of free rent to keep new luxury apartments from going empty.
And early last year, The Washington Post wrote that an increasing supply had driven down rents, partly by pushing landlords of luxury buildings to lower prices so they could compete.

Any effort to make our region more affordable will require a good deal more market rate housing than what we currently have. Hopefully, DC will build on the successes of 2015 and continue to allow high levels of dense housing construction.

John Ricco, a public policy analyst by trade, is interested in the economics of urbanism and transportation. He recently moved away from DC and now lives in Philadelphia. 

Comments

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See, I told you that supply and demand are connected. Tons of GGW commentators seem to doubt this.

by Hadur on Feb 4, 2016 2:39 pm • linkreport

Slowing from $2-4k? Look at all this money I still don't don't have in my pocket. Lol

by Paul on Feb 4, 2016 2:46 pm • linkreport

Has DC's population growth slowed at all? I have to wonder if the significant increase in crime last year might've scared some people off.

by Rick on Feb 4, 2016 2:47 pm • linkreport

The trend in housing production is even more striking when you remember that a single-family house built in DC is likely to be a teardown, which doesn't add any supply to speak of.

by Ben Ross on Feb 4, 2016 2:56 pm • linkreport

@ Hadur

What's the old adage? Correlation doesn't mean causation. Housing is not a fungible widget that can be easily commoditized and interchanged for another. It is quite easy to get caught in a trap that more units in dense places will drive down costs and decrease urban sprawl. While an attractive concept, it is a logical fallacy.

For example, if developers are building X number of 2br/1ba apartments in Navy Yard in high-rise luxury (using the term rather loosely here) buildings and they are all hitting the market at the same time, yes, they are creating a market of interchangeable goods. Since the goods are fungible in this marketplace, supply and demand will function as expected.

However, those developers in my hypo have created a submarket that did not previously exist and have little, if any, effect on similar units in other submarkets--housing of different types or in different communities.

To put in the vernacular, no one ever says hey I was priced out of that dream home in Fairfax so I will live in a 2br/2ba condo in Columbia Hts. If we were talking about grain or oil or widgets, yes that would happen, but consumers preferences in housing are no where near as fickle.

The article is an interesting read, but its policy viewpoint oversimplifies the economics of housing and relies too much on anecdotal evidence.

by Paul J. Meissner on Feb 4, 2016 3:03 pm • linkreport

"What's the old adage? Correlation doesn't mean causation. "

Except when there is abundant theory causally linking two phenomena, and forecasts were made suggesting one would lead to the other (forecasts which were vigorously denied) there is a good chance that correltation does imply causation - at least the burden of proof is on those denying it.

"Housing is not a fungible widget that can be easily commoditized and interchanged for another."

To some degree it is.

" It is quite easy to get caught in a trap that more units in dense places will drive down costs and decrease urban sprawl. While an attractive concept, it is a logical fallacy." It may be incorrect, but it is certainly not a logical fallacy.

"For example, if developers are building X number of 2br/1ba apartments in Navy Yard in high-rise luxury (using the term rather loosely here) buildings and they are all hitting the market at the same time, yes, they are creating a market of interchangeable goods. Since the goods are fungible in this marketplace, supply and demand will function as expected.

However, those developers in my hypo have created a submarket that did not previously exist and have little, if any, effect on similar units in other submarkets--housing of different types or in different communities."

Then where, pray tell, do the residents come from? Do they decide to move to the DC area because the Navy Yard neighborhood exists? With rare exceptions, I doubt that. They are most likely drawing on people who would have lived in multifamily in other neighborhoods. Ergo, those markets are linked.

"To put in the vernacular, no one ever says hey I was priced out of that dream home in Fairfax so I will live in a 2br/2ba condo in Columbia Hts. If we were talking about grain or oil or widgets, yes that would happen, but consumers preferences in housing are no where near as fickle."

People do say I was priced out of a 2 BR condo in Columbia Heights, so I will get a 2 BR condo in Trinidad, or in Arlington. People say that they were priced out of a small SFH in Clarendon, so they will buy a condo in Clarendon. They do say they were priced out of a SFH in Clarendon, so will buy a SFH in South Arlington, or yes, in Fairfax.

The submarkets are linked. Some linkages are stronger, and some are weaker (in the technical language of microeconomics, some cross elasticities are greater than others) In the language of intro econ, when chips get more expensive, people will buy more pretzels. Some will. Others will not.

"The article is an interesting read, but its policy viewpoint oversimplifies the economics of housing and relies too much on anecdotal evidence."

It oversimplifies far less than the reflexive "supply and demand does not count in housing markets" crowd.

by CrossingBrooklynFerry on Feb 4, 2016 3:15 pm • linkreport

Hadur, yes, and it should also help eliminate the myth of a housing shortage in DC.

Rick, crime in DC declined from 38,424 (2014) to 36,488 (2015).

Paul J Meissner, it's well accepted in academia that supply and demand affect housing prices.

by Kevins on Feb 4, 2016 3:21 pm • linkreport

no one ever says hey I was priced out of that dream home in Fairfax so I will live in a 2br/2ba condo in Columbia Hts.

Well they say, so I'll go with a townhome in Fairfax or possibly something a bit bigger in centreville.

Or in DC they'll go with a condo over a townhouse.

You're right that most people don't make wild jumps in their housing choices but I don't think that just because people aren't including that caveat that it means the whole phenomena just goes out the window.

by drumz on Feb 4, 2016 3:21 pm • linkreport

DC has done a pretty good job of encouraging the construction of large, market-rate luxury buildings downtown and in adjacent neighborhoods (not the best – that would be Seattle!), but the city needs need to work on encouraging slightly-less-luxurious market-rate development if they want to see rent growth moderation at lower price points. Practically, this means zoning for cheaper building typologies (townhouses in single-family detached neighborhoods, and small apartment buildings in row house neighborhoods) in outlying areas where land prices are cheaper.

Filtering is all well and good, but it takes a long time, and it affects markets most proximate to what's being produced. So if you can get new supply at lower price points, you're going to be putting pressure on older housing at lower price points.

by Stephen Smith on Feb 4, 2016 3:25 pm • linkreport

"Hadur, yes, and it should also help eliminate the myth of a housing shortage in DC."

In economics, there is technically a "shortage" only when supply and demand do not equilibrate, because of a restriction on price. That price is particularly high, does not indicate a "shortage" In fact the problems that people associate with shortages, do exist. They exist a little bit less because of the supply that has been added, but they still exist, because that supply is making up for both years when little new supply was added, for growing demand in the region (despite a couple of years when that slowed) and (for WUPs) a general turn toward demand for WUP living.

by CrossingBrooklynFerry on Feb 4, 2016 3:26 pm • linkreport

Any evidence that this would also slow rent increases in the "missing middle" sorts of housing? Or does it only affect apartment buildings and not, say, rowhouses and walkups and that sort of thing?

(Because that's the real undersupply, is rowhouses.)

by Low Headways on Feb 4, 2016 3:47 pm • linkreport

"To put in the vernacular, no one ever says hey I was priced out of that dream home in Fairfax so I will live in a 2br/2ba condo in Columbia Hts.

They will say hey, I was priced out of a 2BR apartment in DC with amenities that I like, so instead I will round up some friends and rent a house, which takes said house off the market for a family that would not occupy a 2BR apartment.

by massysett on Feb 4, 2016 4:05 pm • linkreport

@ Low Headways

I was going to say the exact same thing. Mr. Ricco's graph even proves more or less that the the massive multifamily properties have a life (or rather a market) of their own almost independent of the small multifamily and SFHs. And the massive multifamily market quite possibly indicates a future oversupply while the rowhouse/SFH market indicates a future undersupply.

Any developer worth his salt needs to pack as many housing units into the smallest parcels, so they can't build 1-to-4 unit properties, rowhouses, or SFHs in the District.

But when empty-nesters pass on or retire to warmer climates and when millennials want backyards and decent schools, there will be little in the District to support their new preferences. They will leave the submarket that once was targeted toward them and those properties will become more or less obsolete.

Along the lines of the Baltimore article last week, I wonder if the GGW of the future will have any article about what to do with empty high-rises in Navy Yard or H Street?

by Paul J. Meissner on Feb 4, 2016 4:17 pm • linkreport

no one ever says hey I was priced out of that dream home in Fairfax so I will live in a 2br/2ba condo in Columbia Hts.

"Here's one example that makes no sense to me, therefore this entire phenomenon, which many economists say exists, must not exist."

A 2br in Columbia Heights may not directly complete with a large lot home in Fairfax, but it competes with 2brs in Arlington that complete with other types of family properties further out. It's a chain.

To somehow say that more housing in one place doesn't equate to any changes in living patterns seems silly to me.

by MLD on Feb 4, 2016 4:28 pm • linkreport

Low headways

That depends largely on the cross elasticity of multifamily and townhouses. In addition to some families that may be choosing between an apt/condo and a rowhouse, there are also, AFAICT, some houses in DC inhabited by groups of unrelated roommates. I do not know the numbers - and even harder to find, is how many of those roommate groups will leave houses if multifamily becomes cheaper (generally forming smaller groups, or ceasing to live with roommates entirely)

Another way that multifamily will help people in pursuit of rowhouses, is by providing the density that makes transit more possible. For example some people will find a more affordable townhouse in Reston Virginia, and they can now get that walking distance to transit, because hirises in Tysons and Reston made the SL viable. That may not have a strong impact on the market in DC though.

by CrossingBrooklynFerry on Feb 4, 2016 4:37 pm • linkreport

"Along the lines of the Baltimore article last week, I wonder if the GGW of the future will have any article about what to do with empty high-rises in Navy Yard or H Street?"

If the Federal government disappears, moves, or automates. Maybe. And BTW, there was nothing in that article to hint that those townhouses in Baltimore were an unwise in investment.

by CrossingBrooklynFerry on Feb 4, 2016 4:38 pm • linkreport

Baltimore is building lots of apartments and many newcomers are setting in Baltimore's harbor adjacent neighborhoods in particular. In the bullet point about Baltimore, the hyperlinked article discusses how people are moving in, but bypassing the most challenging neighborhoods (often for new city apartments)

There are 5800 apartments under construction in the 36 month pipeline according to this article which discusses Baltimore's "burgeoning" apartment market. http://rebusinessonline.com/baltimores-resurgence-as-a-city-supports-burgeoning-apartment-market/

by Jeff La Noue on Feb 4, 2016 4:40 pm • linkreport

@Rick. No as it stands DC adds 10k-14k people a year. Even with the crime spike, which was still far worse east of the river, things are still growing rapidly. Even then, it was largely a spike in homicides, and it was still far below the levels in the 1980s-1990s, and within the range of the last 10 years.
If the development of housing does not keep up with demand, rental prices will in fact get much worse very quickly. As it stands the price range still provides incentives for developers to continue building.

The other thing is even though crime spiked, so did job growth in DC. It picked up significantly, which means there will be more demand for housing. Also it is only when higher crime persists for a number of years that one sees a major drop off of population. That is yet to be seen. If it remains largely isolated east of the river...it will likely not effect development and population growth west of it.

This is one important note to people who think "what will happen when they have families". It is critical to understand that there is a far different pattern of family formation than there was in the past. With boomers 9 in 10 had kids. Starting with gen X but persisting with millenials that started to fall. Now 2 in 3 (college educated) to 3 in 4 (general) have kids, basically a massive drop off. Those that do have kids also have fewer kids. The childfree, especially the college educated of the childfree, have a significant urban preference. Also it should be noted the college educated are far less likely to have kids, they also delay child rearing until their thirties. This is why there are huge demographic shifts, and why you shouldn't expect the past to repeat itself. Sorry boomers, things really are different. To many who don't want kids, the 2 BR condo in Columbia Heights is far more a dream home than a place in Fairfax in a "child friendly" neighborhood. Without understanding these shifts and the data in the demographics it is easy to make the assumption things are not changing, but they have changed significantly. Just to note, in DC only 20% of households have children, and that is rapidly dropping.

This is a big reason why DC is changing so quickly, and why those changes are likely to stick. Without understanding the generational shift that happened with X in terms of childrearing one would think we will be left with an oversupply. The reality is that is not likely to happen any time soon.

by CC on Feb 4, 2016 4:45 pm • linkreport

Lots of college educated millennials coming to Baltimore in particular

http://www.baltimoresun.com/business/bs-bz-millennials-20141025-story.html

by Jeff La Noue on Feb 4, 2016 4:50 pm • linkreport

"But when empty-nesters pass on or retire to warmer climates and when millennials want backyards and decent schools, there will be little in the District to support their new preferences. They will leave the submarket that once was targeted toward them and those properties will become more or less obsolete."

This is the classic "Demographic X All Do Y" that's been done to death here.

No, not all empty nesters are going to move to Tampa, and no, not all Millennials are going to have kids and run for the burbs. Also, this is not Childhood's End, and Millennials will not be the last generation of humans on Earth.

by oboe on Feb 4, 2016 5:10 pm • linkreport

@ MLD

Of course there will be some ripple effects or "filtering" (the term used by @Stephen Smith) among neighborhoods or housing types.

But the effect of building one type--and pretty much only one type--of housing is going to have only a slight change in the overall housing market.

Interesting juxtaposition: if a rep from Ryan or another big homebuilder said if they build some subdivision in Leesburg and through the invisible hand of the market the rents in DC will decrease, I wouldn't buy that argument either.

by Paul J. Meissner on Feb 4, 2016 5:18 pm • linkreport

This is sort of obvious. All we build are rental apartments. How many new (ie, not replacing) 3 bedroom ownership units (row houses or condos) did we build last year?

Personal anecdotes are worth very little, but when I moved here in 2011, I was in the rental market for a one bedroom, something new-ish in a big building and realized I could get that for somewhere around $2200-2500. Over 4 years later, that still feels like the range. Now if you like at the price to purchase a 3 + bedroom rowhouse, in some neighborhoods you're looking at a 40% jump, and at least 25% jump. We need to build way more condos and rowhouses.

by 11luke on Feb 4, 2016 5:25 pm • linkreport

Ben Ross -- most rebuilds of existing houses get through by being "alterations". Do they get counted as new builds?

by Richard Layman on Feb 4, 2016 5:25 pm • linkreport

I bet developers would love to build more rowhouses or 3br units. But a lot of the opportunities to do that are locked up in established neighborhoods with strict zoning (that is trying to get stricter wrt to subdividing units) so what you're left with is vacant parcels or former low density commercial. Townhouses and big units don't have a good enough ROI when land like that costs so much.

by drumz on Feb 4, 2016 5:29 pm • linkreport

@ oboe

Not all people are the same by any means. However aggregations of people pretty much are.

As @CC said young educated professionals are waiting to get married and have children. That's true, but they still will at some point, and that 2/1 condo wont be large enough anymore.

Think of it not as Childhoods End but more as Psychohistory.

by Paul J. Meissner on Feb 4, 2016 5:34 pm • linkreport

I think some commenters are looking at too gross grain what I call the "metropolitan residential landscape." It's comprised of a bunch of submarkets sure, and then housing type sets. There are scads of micromarkets.

While a condo in Columbia Heights doesn't compete with a SFH in a subdivision in Fairfax, it does compete with submarkets elsewhere in DC, along Wilson Blvd. in Arlington, parts of Alexandria, but probably not much in Montgomery County, maybe Silver Spring.

(Many years ago I talked to a couple here for a year on a kind of work training program. They were looking at Van Ness, someplace else, and Arlington. It was 1999. The options in DC for multiunit + fun was limited then and they ended up in Arlington.)

Similarly, some portions of the market have substitutable preferences in some categories. Rowhouses vs. condos/apts. in the core. Rowhouses

WRT Stephen Smith's comment, I do think the height limit ends up shifting most of the construction of new housing to the highest value housing types, that is the luxury segment.

But yes, more or less, adding supply impacts price. As has been discussed here in the past, people like CBF and myself have pointed out that prices remained high despite new production because of high latent unmet demand.

Maybe the market is now coming closer to equilibrium.

by Richard Layman on Feb 4, 2016 5:38 pm • linkreport

As the Brookings report yesterday reported, and they admitted here, there is weak job growth in the DC area.

In terms of rents, they are shrinking in the metro area, but not in DC itself.

Class B and below is holding up quite nicely. Class A growing.

@RichardLayman; RE SFH vs multiunit the new affordable requirements are pushing this.

by charlie on Feb 4, 2016 6:09 pm • linkreport

those developers in my hypo have created a submarket that did not previously exist and have little, if any, effect on similar units in other submarkets--housing of different types or in different communities.

You realize, of course, that if someone wants to buy a place in DC, and they don't have a pricey one available, they will simply buy a less pricey want and upgrade it to their specifications, right?

Not everyone wants to buy a Ferrari. But if there are no Ferraris available, people will be perfectly happy to buy up any and all Toyota Camrys lying around, because it is worth it for them to have a car.

by Tyro on Feb 4, 2016 7:07 pm • linkreport

Off course the problem is that all that housing is aimed solely at rich DINKs, and rich up-and-coming lawyers and lobbyists. I.e. people who make easily over k$200-300. Try finding something on k$100 and less.

In short: It won't take long before the first actual republican will get elected on the DC council.

by Jasper on Feb 4, 2016 8:52 pm • linkreport

@CC, it's worth keeping in mind that DC's population growth is slowing, as is the job market. This is true for the District and the region as a whole.

by WestEgg on Feb 4, 2016 8:56 pm • linkreport

@WestEgg. Your information is very 2014. DC's population growth ended up NOT slowing. We were back to adding 12,000+ residents a year. Also job growth, 2015 saw a great deal of job growth too. It may help you to actually keep up to date with information. 2014 was a slight decline, not a trend. The region as whole, who cares how bad things are going for defense industry linked NoVA, especially the exurbs. DC is still in fact growing, even if it had a slightly slower year in 2014. The trend continues inside the city itself. DC is still growing quickly. But thanks for highlighting how out of date you are with your data. One not as great year does not make a trend. Likewise a dip from 12,000+ a year to 10,000+ a year is not much of a dip. DC's population growth is not slowing.

by CC on Feb 4, 2016 9:07 pm • linkreport

@ Tyro

Yes yes they will find something whether it's living at home for a while or with roommates or commute from Maryland.

But that's outside of the original premise of Mr. Ricco's article: the more housing units that are built in the District, the more that rents (and presumably other housing costs) will drop.

But any developer or advocate who tells you that will not tell you that no matter how many new massive multifamily units developers build in the District, the monthly rent will never drop enough to accommodate the average salary of an entry level worker.

If there is a projected oversupply of a particular use, meager price accommodations may occur but smart builders will mothball their projects until the market recovers.

by Paul J. Meissner on Feb 4, 2016 9:15 pm • linkreport

My best guess for the foreseeable future is that the District can build as much housing as developers can finance, and yet remain buffered from oversupply concerns regardless of what happens to the regional economy. This is because with the recent gains in amenities and housing options, there will continue be a ready supply of people who would move into DC from the suburbs when prices drop by some amount. As a result, there is a floor on prices in DC that is probably above the cost to build. Obviously, the amount of supply hitting the market is slowing price growth, but that's a good thing not just from an affordability perspective but also because it brings in even more residents who contribute positively to the tax base.

by dno on Feb 4, 2016 10:34 pm • linkreport

the more housing units that are built in the District, the more that rents (and presumably other housing costs) will drop.

San Francisco has been running a 20-year long experiment in what happens to the housing market when you only build very minimally.

I'm either going to buy/rent one of those new units, or I'm going to buy/rent your home if nothing else is available. The pent up demand will spill over into your backyard (literally) if it's not accommodated.

by Tyro on Feb 4, 2016 10:37 pm • linkreport

@Paul: "Slowing from $2-4k? Look at all this money I still don't don't have in my pocket. Lol "

If the top-end buildings are slowing down on their rent increases that should affect the other tiers of the housing market as well. In older buildings/buildings that have less amenities/etc, if they creep too close to the rents in all the new luxury buildings then more people are apt to starting thinking "well maybe I can stretch $100 a month more to live in that nicer, brand new building". They have to maintain a buffer between their rents and the rents in the new buildings so the pace of their rent increases will necessarily be related to the rent increases in the new buildings.

by Jason on Feb 5, 2016 2:00 am • linkreport

Rent growth for 2016 will be even lower than it was last year.

However, the oversupply will be absorbed thanks to DC's rapidly growing population, and rent growth will be back above 3% for 2017, 2018, until the next economic dip.

by King Terrapin on Feb 5, 2016 9:10 am • linkreport

My goodness! The lengths people will go to in order to justify their theory that supply and demand don't drive market prices.

To all of those who pointed out that, of course, they do [See: fundamental theories of capital markets], thank you for your commentary. Rationality and reason are always a benefit to urban policy.

by RailGuy on Feb 5, 2016 9:54 am • linkreport

@RailGuy

No one is refuting the general concept supply and demand drive market prices, the argument is that the concept is fundamentally broken when applied to housing units in the District.

To use your term, this market is most certainly not rational.

by Paul J. Meissner on Feb 5, 2016 10:13 am • linkreport

" the argument is that the concept is fundamentally broken when applied to housing units in the District."

I see no serious case for that POV, though.

by CrossingBrooklynFerry on Feb 5, 2016 10:19 am • linkreport

This is anecdotal, I know, but I’ve been able to negotiate rent decreases for my older apartment unit the past two years (50+ year old building in Falls Church City). I pay less in rent now than I did back in 2013 for the same unit in the same building. If you think supply and demand don’t impact housing, you’re simply wrong. Like other parts of the region, Falls Church has seen a ton of new construction. It’s mostly brand new luxury apartment buildings. It’s also SFH teardowns/replacements (i.e., replacing a small 1950s SFH with a huge brand new SFH). By definition, they aren’t building any more 50+ year old buildings as direct competition to my place. So why have I been able to get lower rents? Well, housing supply has gone up, and demand for old units without modern amenities has gone down. Both factors drive down price. This is high school level economics. I’m not sure why people are denying this.

by Jason S. on Feb 5, 2016 10:28 am • linkreport

@Jason S.

Again I believe the conversation was about new construction in the District.

If a someone here was able to get a new housing unit in DC for a decent rent (no more than 33% the average local salary) using no more than the invisible hand of the market and their negotiating superpowers, I would gladly cede defeat and donate $50 to GGW.

Til then...

by Paul J. Meissner on Feb 5, 2016 10:56 am • linkreport

Just because things didn't get cheap all of a sudden doesn't mean that laws of supply and demand didn't have an effect on DC rents and real estate.

by drumz on Feb 5, 2016 11:05 am • linkreport

And just as a reminder, the idea isn't to create cheap housing. The entire game is to ensure a slow, steady rise in housing prices and values -- ones that tracks income gains.

The problem in DC is we have 40% of the population that no or low income and little prospect of it improving. And no, I'm not including interns in that number.

by charlie on Feb 5, 2016 11:05 am • linkreport

"And just as a reminder, the idea isn't to create cheap housing. The entire game is to ensure a slow, steady rise in housing prices and values"

In any other area of economic activity, the goal of microeconomic policy is to improve productivity, reduce costs, and thus decrease real prices. From healthcare to computers to electricity. (And mostly for food, though the propping up of farm prices for political reasons is not only bad public policy, but suggestive of the issue in housing) I do not see why housing should be any different. Except that there is a large voting block of homeowners with an interest in housing not becoming cheaper.

by CrossingBrooklynFerry on Feb 5, 2016 11:11 am • linkreport

"If a someone here was able to get a new housing unit in DC for a decent rent (no more than 33% the average local salary) using no more than the invisible hand of the market and their negotiating superpowers, I would gladly cede defeat and donate $50 to GGW."

Arbitrary goal - new housing is always more expensive than old, and the District is the more central part of the region, and new housing in WOTR DC is generally the most expensive (per sq ft) in the region. We may never make new housing in WOTR DC affordable to people with average salaries. But if the provision of new housing in WOTR DC makes older housing in DC more affordable, or makes new housing in close in suburban TOD (and it will, if the submarkets are well linked) then new housing in DC can be of benefit to people of average salary seeking housing.

by CrossingBrooklynFerry on Feb 5, 2016 11:15 am • linkreport

It feels like there is a fair bit of myopia here about the housing crisis in DC. Sure, supply and demand affects housing markets. Congrats on that theoretical victory. But it is not at all clear that rent stabilization at the luxury end of the market is going to help the folks who are actually being displaced from the city (families making under 30 or 40K a year). The market for luxury apartments is at best only loosely connected to family sized apartments or houses. In other words, yes the submarkets are linked but not enough to make DC affordable enough, quickly enough for folks who are facing displacement NOW.

Increasing the general supply is an important part of solving the crisis, but is very much just that: a part. So its weird to see how self-congratulatory this comments section is. Not quite time to hang the 'Mission Accomplished' banner. Or, I guess, the exact right time?

by myco on Feb 5, 2016 11:22 am • linkreport

"Increasing the general supply is an important part of solving the crisis, but is very much just that: a part."

I agree, and I think you will find many of us (though not all) who support the market approach, agree. I join the Coalition for Smart Growth in calling for the retention and creation of committed affordable housing units (not only in DC, but in other jurisdictions, including Alexandria where I live) I think the added market supply may have a small role in helping the folks at the bottom (sometimes not via submarket linkage, but via IZ and other developer contributions) but a much larger role in addressing affordability issues further up the income chain (for example the average salary people Mr Meissner mentions)

by CrossingBrooklynFerry on Feb 5, 2016 11:26 am • linkreport

I think the answer to housing affordability is threefold

1. Market suppy

2. Committed affordable units

3. Addressing income

by CrossingBrooklynFerry on Feb 5, 2016 11:27 am • linkreport

" I do not see why housing should be any different. Except that there is a large voting block of homeowners with an interest in housing not becoming cheaper."

Isn't housing different because land values should increase with population increases? If you actually allow development to accommodate market demand via density, then you wouldnt you get both stable price/sq ft in dense developments and increased value in low density areas?

by Administrator on Feb 5, 2016 11:28 am • linkreport

@ myco +1

Thought I was all alone on this one.

by Paul J. Meissner on Feb 5, 2016 11:31 am • linkreport

@ myco, RE: myopia. no it just a bunch of underemployed economists who like the draw lines and make a x in the sand and pretend that explains everything.

by charlie on Feb 5, 2016 11:34 am • linkreport

"But it is not at all clear that rent stabilization at the luxury end of the market is going to help the folks who are actually being displaced from the city (families making under 30 or 40K a year). The market for luxury apartments is at best only loosely connected to family sized apartments or houses. In other words, yes the submarkets are linked but not enough to make DC affordable enough, quickly enough for folks who are facing displacement NOW."

Demand is fundamentally changing. Rich people--and DC is full of them--want to live in WUPs as close to downtown as possible. Long term-there is no way that families making 30 or 40k can afford housing in DC without a subsidy. How can they compete with DINKs and massive amount of high salary professionals in the area. If we build more now we can keep prices down farther out, but displacement is unavoidable absent some type of subsidized housing.

by Administrator on Feb 5, 2016 11:35 am • linkreport

Admin

It is a ceteris paribas issue

I am comparing growth with good policies to growth with bad policies, not comparing growth to no growth.

The question of the costs and benefits of encouraging regional economic growth is a different discussion,

by CrossingBrooklynFerry on Feb 5, 2016 11:39 am • linkreport

Charlie

Clearly people trained in analyzing the relationship of quantity and price are the last people who should discuss it. Just as we should not listen to climate scientists about climate, I suppose.

by CrossingBrooklynFerry on Feb 5, 2016 11:42 am • linkreport

Except that there is a large voting block of homeowners with an interest in housing not becoming cheaper.

It's not just homeowners though that want higher home prices. It's local governments and the citizens desiring government services that are funded via property taxes. Driving real home prices down means less real funding for schools, roads, parks, etc.

by ArlingtonFlyer on Feb 5, 2016 11:46 am • linkreport

"It's local governments and the citizens desiring government services that are funded via property taxes"

Local govt has an interest in higher total assessment (or at least assessment relative to service consumption) not necessarily in higher price per square foot. In the context of increasing supply (which is the subject of this post), those are very different things.

Note that outside the context of adding supply, the fact that property taxes may incent govts to discourage efficiencies in housing production (say to favor luxury units over non-luxury units), is a distortion related to the use of the property tax to finance local govt (which does not mean that should end - there may be offsetting benefits)

by CrossingBrooklynFerry on Feb 5, 2016 11:55 am • linkreport

but CBF "what Administrator said" and "what dno said"

is fundamentally the reason why "the affordable housing crisis" in DC is a "crisis" and without extranormal involvement in nonmarket ways (purchase of housing by nonmarket actors like nonprofits, massive subsidies, land trusts, building 100% affordable housing on public properties, etc.) and dealing with public policy derived constraints (height limit, which constrains density, reducing supply, which increases price), etc. is unaddressable.

The agenda on housing by most of the area's advocacy groups seems to be very disconnected from this reality.

E.g. on a community e-list the other day I got pissed when someone commented about why does W2 and W3 still escape offering AH. I said you can build AH anywhere you want, if you're committed to providing the necessary package of funding, land, density bonuses, etc., it's just that the cost to do that relative to other locations in the city is so high it doesn't make sense (other than the IZ requirement).

As long as people think about the issue in such facile ways, we won't move forward.

by Richard Layman on Feb 5, 2016 11:58 am • linkreport

(not that anything you've written is facile, just to be clear.)

by Richard Layman on Feb 5, 2016 11:59 am • linkreport

I think we should add as much housing as we can without significantly impacting in a negative way, existing places.

That means intensifying development in commercial corridors and metro stations. It means considering puncturing the height limit downtown. It means allowing conversion of large houses, rowhouses especially, into flats. It might allow some increase in size of current housing (popbacks) to accommodate this, depending on the size of the lot. It means encouraging ADUs. It means not discouraging "two" ADUs on a site (not allowed), if it could be reasonably accommodated given the lot size (e.g., my lot is about 7600 s.f., one-sixth of an acre). It means doing some subdividing of large lots (like the lots along that street on the east side of the red line north of Brookland and south of Fort Totten) and adding housing. It means systematically infilling the rare vacant lots spread here and there across neighborhoods. It means systematically rebuilding certain garden type apartment buildings and complexes (currently about 3 stories tall) to higher heights, etc.

I'm not sure I'd be ok with conversion and upzoning of residential blocks, unless all of the neighbors agreed, but selectively it could occur.

Doing all that will allow the city to add a couple hundred thousand more residents, which will significantly improve the city's financial outlook and strengthen the success of retail, public safety, the provision of other amenities, etc.

But if the market leads all of that change, it won't help the AH picture that much, except that you can systematically support the development of AH buildings in that context, with for profit (companies like WCSmith) and nonprofit actors simultaneously.

E.g., I'd like to put a team together to build some 100% AH buildings as an element of the redevelopment at AFRH. But this hasn't been done in similar situations elsewhere in the city, when comparably large parcels have come available for reuse (e.g., WRMC).

by Richard Layman on Feb 5, 2016 12:15 pm • linkreport

I think we should add as much housing as we can without significantly impacting in a negative way, existing places.

That means intensifying development in commercial corridors and metro stations...

I just want to point out that while I agree with your general sentiment, there are plenty of people who would argue that more intense development around Metro stations is a negative, significant impact to existing places.

Point being, we need a better, more precise way to define what you mean by 'negative impact,' and what counts as 'significant.' And we need some kind of collective understanding of those terms, since they will mean very different things to different people.

by Alex B. on Feb 5, 2016 1:10 pm • linkreport

@ CBF and my friend @Mr. Layman

There is another thing that is of utmost importance that we should have discussed before now.

A disproportionate number of new upscale housing units are rented as second homes and condos purchased as investment properties. Just like any good or service, consumers may take more than their usual share, creating additional market instability.

Oddly and possibly ironically, the fact that many DC neighborhoods are desirable causes highly affluent consumers and investors to artificially inflate the housing market without increasing the permanent population.

by Paul J. Meissner on Feb 5, 2016 1:20 pm • linkreport

"A disproportionate number of new upscale housing units are rented as second homes"

This is a problem in London, and in at least a neighborhood or two in NYC. Is it really the case in DC? I am skeptical, but would love to see some evidence.

" and condos purchased as investment properties."

As long as they are rented out, that is supply (now there is some debate about the linkage between the rental and condo markets, which I think is fairly high, but seem think not so much)

by CrossingBrooklynFerry on Feb 5, 2016 1:29 pm • linkreport

Alex B. -- right you are as most always. The way I define "least amount of change" is at the scale of an individual property and residential blocks and districts.

E.g., while development on the Takoma Metro site impacts that block and the core of the neighborhood, the fact is that the 180+ residential blocks--a mix of detached and attached single family houses, interspersed with apartments--remain unchanged.

But as you point out, that doesn't mean that the area doesn't change, and the commercial district changes.

But how much is the neighborhood changed negatively, by such changes? And how much is the neighborhood improved, by being able to offer a wider range of types of housing and retail amenities, which are supported by the addition of population?

That to me is the definition of the best amount of additions at the least amount of cost.

by Richard Layman on Feb 5, 2016 2:52 pm • linkreport

Paul J. Meissner -- there is no question in certain high value neighborhoods such as Georgetown, Foggy Bottom (e.g., the Ritz Carlton), Penn Quarter, a goodly part of the demand is generated by "second home" purchases by nonresidents purchasing multiple properties in globally attractive and connected cities.

But compared to London, Charleston, SC, New York City, Miami, etc., I think that this isn't a huge factor in our local market.

2. something I wrote a few years ago, criticizing a piece by Megan McArdle, is that people are failing to recognize that as the city becomes more attractive (a point made by dno quite succinctly) the demand for center city is increased by more segments of the market willing to consider DC as a legitimate place to live, thereby increasing demand to a level that exceeded previous demand in a manner that stokes prices significantly.

http://urbanplacesandspaces.blogspot.com/2012/10/exogenous-market-forces-impact-dcs.html

Basically the greater number of highest income households chasing properties crowds out the less economically advantaged. (But at the same time this drives improvement in nearby neighborhoods that are less attractive to those segments.)

by Richard Layman on Feb 5, 2016 2:57 pm • linkreport

The above comments provide a substantial basis to show that the supply and demand analysis presented to support the claim that “this new supply is slowing rent growth” is seriously flawed. The supply and demand concept is not fundamentally broken, but its application here, drawing conclusions from the count of permitted new housing units in the District, is based on a fundamental error in how the market is defined and how developers, in a larger market, would react to lower prices and profitability in DC proper or the metropolitan area.

First, several commenters (CBF, MLD and Richard Layman) point out that the DC housing market is part of a larger market. For example: “People do say I was priced out of a 2 BR condo in Columbia Heights, so I will get a 2 BR condo in Trinidad, or in Arlington,” or “A 2br in Columbia Heights may not directly complete with a large lot home in Fairfax, but it competes with 2brs in Arlington,” or “While a condo in Columbia Heights doesn't compete with a SFH in a subdivision in Fairfax, it does compete with submarkets elsewhere in DC, along Wilson Blvd. in Arlington, parts of Alexandria, but probably not much in Montgomery County, maybe Silver Spring.”

So an analysis based on the number of new units permitted or built in DC ignores the importance of the supply of similar types of units in Arlington, Alexandria, Montgomery, Prince Georges County or other nearby communities.

Second, a raw count of permitted units does not take into account the diversity in the types of units, which might be changing over time. While there is a chart that looks at the number of single family homes, 2-unit multifamily housing, 3-4 unit housing or multifamily housing with five or more units, there is no data presented that gives the distribution based on square footage or number of rooms or bedrooms.

Most importantly, the analysis seems to rest on the assumption that developers will ignore changes in rent or sales prices when deciding how to proceed with their current or future projects. Yet, DC and even DC with the nearby communities that might be close substitutes are part of a larger real estate development market. If there is a temporary “glut,” and rents and sales prices were falling in DC, “smart builders will mothball their projects until the market recovers,” as noted by Paul J. Meissner yesterday. We also frequently see that developers will change the project, switching between condominiums and rental, or between residential and commercial. Finally, if increased supply in the area really depressed rents, we would likely see developers turn their interest to projects in more profitable areas.

As an aside, when development includes very large projects, the increases in supply are lumpy, and it can take some time for new units to be absorbed. Comments have been made that seem to see rent and sales concessions are having a large impact on long term pricing. Concessions granted to tenants, such as a month or two free rent, to keep new luxury units from going empty generally are structured in a way that the concession is specific to the unit and temporary. While the tenant will have a lower average rent for the term required to receive the concession, at the end of that period the rent bounces back to the standard level (plus any annual increases), and that is when the tenant needs to consider moving costs if they do not want to accept this large rent increase. For concessions on condominium sales, they frequently are done in a way that will not affect future sales by showing a lower price in the city records. For example, the developer would offer some free or reduced cost upgrades. The management companies and developers know how to structure these deals to maximize their long term profits, and minimizing the impact on future rents or sales is part of that.

Jason S. describes this as “high school level economics,” but I hope that GGW plans on posting a more thorough, nuanced analysis of this complex issue.

by Michael on Feb 5, 2016 4:38 pm • linkreport

[This comment has been deleted for violating the comment policy.]

by MLD on Feb 5, 2016 11:11 pm • linkreport

@Michael
Let's tackle these one at a time:

"So an analysis based on the number of new units permitted or built in DC ignores the importance of the supply of similar types of units in Arlington, Alexandria, Montgomery, Prince Georges County or other nearby communities."

Sorry, but how does the article fail to address its central point that DC is building lots of housing and there is some evidence that rental prices are also falling, so there might be a connection? Saying that housing growth in other competing places in the region may also have an effect doesn't seem to run counter to wet this article is saying- to me it reinforces the central point.

"Second, a raw count of permitted units does not take into account the diversity in the types of units, which might be changing over time. While there is a chart that looks at the number of single family homes, 2-unit multifamily housing, 3-4 unit housing or multifamily housing with five or more units, there is no data presented that gives the distribution based on square footage or number of rooms or bedrooms."

Again, that this article leaves out some data point you like does not make it a failure. What do you think that information would tell you?

"If there is a temporary “glut,” and rents and sales prices were falling in DC, “smart builders will mothball their projects until the market recovers,"

In practice, it is hard for developers to do this quickly because the process for bringing a project to market is years long, and you can't often get your money back part of the way through. If a building is under construction, you doing save much by leaving it half built and waiting for prices to increase.

"Jason S. describes this as “high school level economics,” but I hope that GGW plans on posting a more thorough, nuanced analysis of this complex issue."

I look forward to reading the "more thorough, nuanced" blog piece you're putting together to submit to this website, then!

by MLD on Feb 5, 2016 11:28 pm • linkreport

Cheap housing is old housing. New housing is luxury in a growing city. It is when the new housing ages that supply of affordable housing increases. If we slow down development it stalls the natural depreciation of structures. Slow it enough and land prices counteract the depreciation and housing units grow in value instead of being replaced by new supply. This hollows out the middle and incentivizes the construction of only luxury units.

If rents are stalling at the top and the construction of new units outpaces growth then you will see affordable housing eventually.

The supply and demand crowd may be right, but the lag involved is on a multi-decade level. The cross elasticities exist but they take a long time to effect the market from top to bottom.

There are an unending supply of micro studies that confirm the supply and demand matter, they also suggest that any benefits of increase supply take a long time to propagate through the value chain.

The sides of this argument are talking past each other. The short term effects of increasing supply are often overstated by many. However, the rejection of supply and demand is just as ridiculous.

People need to come up with non-market solutions to mitigate harms in the short-term while increased building continues so as to displace the non-market solutions eventually.

In the end land is the only non-depreciating asset. Unless we let land use by come more efficient and dense then there is no hope for affordable housing long-term unless there is a sudden hit to economic and population growth.

by Errorreport on Feb 10, 2016 2:24 pm • linkreport

"Most importantly, the analysis seems to rest on the assumption that developers will ignore changes in rent or sales prices when deciding how to proceed with their current or future projects. Yet, DC and even DC with the nearby communities that might be close substitutes are part of a larger real estate development market. If there is a temporary “glut,” and rents and sales prices were falling in DC, “smart builders will mothball their projects until the market recovers,” as noted by Paul J. Meissner yesterday."

Except the shortage was severe enough, that the prices were high enough, that prices can fall and still leave much new development profitable. Though there are a few locations where production of new units may have slowed due to lower prices, the volume of production remains high. This is due to the diversity of the market with both demand and cost of construction varying over location.

by CrossingBrooklynFerry on Feb 10, 2016 2:38 pm • linkreport

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