Housing Costs

[Ken]

Ken, supply and demand are important but so is tax structure. The border between Queens and Nassau county is generally indistinguishable but the property taxes in Nassau are roughly double. This makes renting there much more expensive and less likely.

I'm not nearly as familiar with that area as you are. But a little digging suggests there is much more to the picture. Nassau is notoriously much more restrictive on zoning and, in fact, zoned almost exclusively for single family homes, which means that the rentals that do exist are going to be of entire homes rather than apartments. Queens is only 25% zoned to single family homes where it is more like 95% in Nassau County. So far less SUPPLY of apartment rentals in Nassau because there are less apartments, and those rentals that exist are going to be larger homes not apartments. Apply the same zoning between Queens and Nassau and you'd probably see a leveling out of the difference over time. But even so, just looking at rent calculators it looks like rents are lower in Nassau than Queens. There are other issues such as different school districts that may make renting on the Nassau side of the line more attractive.

People study this subject in depth. And what do they find? That there is an almost perfect inverse relationship between vacancy rates and rents in most housing markets in the country. For example, here is Austin TX. During the 2008 recession when the tech sector suffered and vacancy rates went up in Austin, rents immediately dropped. When Austin became the hot tech market again in the early 2010s, boom, vacancy rates went down and rents went back up. Taxes were unchanged during this entire period.



You can do this for any city in the country. Here is Denver



Bottom line? Want to reduce rents (or rent increases) in an area? Allow more housing to be built. Supply and demand. Due to inflation, rents do tend to go up over time. No one charges the rents from 1970 or 1950. So the real issue for housing affordability is keeping rent increases at or below the rate of inflation.

Likewise, if you want to reduce the price of homes in an area (or prevent big increases) it it also about supply and demand. Although that is a bit more complex because you have lots of factors affecting supply of homes for sale beyond just the quantity of existing homes. For example, right now a lot of people who might otherwise sell are locked into their homes by rising interest rates. They might have a 2.5% mortgage on their existing home and don't want to sell because any new home they buy will have more like a 7% mortgage. So the rental market is a bit simpler.

[ken_sylvania]

No, it actually doesn't.

Rents are determined by supply and demand, not carrying costs which are going to be different for every single landlord.

Landlords in general are going to charge whatever the market will bear. You want to bring down rents? Increase housing supply.

Are you a landlord?

My family has been. Then eventually gave it up as not worth the effort. I was happy about that because no more cleaning up, painting, mowing lawns, and late night helping my dad unclog plumbing and so forth. My wife’s family still is and it is a big headache. Especially during COVID.

Why are rents higher in say Manhattan than West Virginia? Supply and demand, not taxes.

In fact, economists track rent and vacancy rates in various cities over time and there is a clear and obvious relationship between the two. Vacancy rates go up (demand drops) rents fall. Vacancy rates go down (demand increases) and rents increase. All of this happens like clockwork when taxes remain stable.

Landlords might WANT to recover all their costs and make a profit from rentals. But it is a business there is no guarantee of profitability. Likewise, every single landlord has a different cost structure of which taxes are actually a minor part. One might have a big mortgage while another has none. One might have higher maintenance costs because the building is older. None of that really changes what they can charge in rent. What they can charge in rent is governed by the market.

Your argument seems to be that cost of goods sold has no bearing on sale price, which is absurd.
If rent costs increase for all landlords it's going to increase the minimum rate they will accept. One of the important aspects of supply and demand that you are ignoring is that supply and the resultant downward price pressure is constrained by the cost of the product, which in this case includes real estate tax.

As to reasons rents are higher in Manhattan than WV? A couple reasons actually, some of which include the increased cost of construction due to the congestion of an urban area, as well as significantly higher property taxes and income taxes.

[Josh]

A typical coop or condo of a 1br in Manhattan has monthly fees around $1,300/mo and taxes of $870/mo. It should be obvious that any rental has to recoup those fees plus property taxes. See https://streeteasy.com/building/monogra ... featured=1 for a typical example.

$26,000 in annual taxes/common fees is a lot, especially for a tiny 600 sq ft apartment. That doesn’t include the cost of water/sewer, etc. which will be extra.

Meanwhile, out where I live, I spend $650/yr in taxes for a trailer with more square footage and that will definitely cost less than $26k to maintain. In fact, after 6 years, the savings in taxes/fees would completely pay for the cost of the property. And the amount of land is over 1,000 times as much.

Can you explain how if a city is more “efficient” it costs so much more to occupy a much tinier piece of land?

Median household income in the NYC metro is $94k and in my metro is $51k or $58k (I live on the border of two different metros).

So… in exchange for less than double of household income, you get to pay $1.3mn for a tiny house, over 8 times what my house cost, your annual cost is $26000 more, and the amount of land you get is 1/1000th.

On the flip side, I’m not near any good bagel shops and the best coffeehouse is a 20 minute drive away.

[Ken]

Can you explain how if a city is more “efficient” it costs so much more to occupy a much tinier piece of land?

Housing costs are only one aspect and reflect the increased economic efficiency of a city because they reflect the increased demand

If you have any kind of skilled profession you have a much larger market for your skills within a city
If you have unskilled labor you are more likely to find demand for it in a city
If you have any kind of specialized business, you have a much larger market for your products or services within a city, and you are more likely to find employees with specialized skills.
If you have any kind of interests beyond being outdoors you are more likely to find them in a city (books, music, art, other special interests)
If you are building infrastructure (streets, bridges, libraries, etc.) you are likely to serve more people within a city.

There are reasons why rural areas have been depopulating around the world for the past century and cities are growing and not just in the US but globally. They are largely economic. And they are also due to the increased efficiency of all rural extractive industries from agriculture to fisheries and mining. For example, much of the great plains is now less populated today than at any time in the past 100 years.

[Ken]

Your argument seems to be that cost of goods sold has no bearing on sale price, which is absurd.

If rent costs increase for all landlords it's going to increase the minimum rate they will accept. One of the important aspects of supply and demand that you are ignoring is that supply and the resultant downward price pressure is constrained by the cost of the product, which in this case includes real estate tax.

There was a house up the street from us that sat empty for over a year. The owners had apparently done some sort of expensive remodel and were insistent that they get X-price for it because that was what they "needed" to sell it for. Meanwhile houses all around were selling within weeks. No one cared how much money they had poured into that house. The only thing that mattered was how it was priced relative to the competition. So they no doubt spent tens of thousands on maintenance, mortgage costs, and so forth until they finally realized that the market didn't care what their costs were. It was no doubt an expensive lesson for them.

Homes and apartments are commodities like any other. If in NYC the supply of apartments increases such that current landlords can't make a profit then they will have made a bad investment and can choose to operate at a loss or sell the building to someone else who's cost structure will be different. The building isn't going anywhere.

Yes there are fixed costs like taxes, maintenance, financing, and construction costs. But they are different for every property owner and the market doesn't care. One building might be owned by a little old lady who inherited it in 1965 and owns it free and clear and who's son does the property management. The building next door might be owned by out-of-state investors who foolishly bought at the top of the market with an 8% mortgage and who pay a firm to manage the building. Their cost structures will be entirely different. The investors of the second building aren't going to be able to charge 3x the rent simply because their costs are 3x higher. Nor is the little old lady going to charge 3x less rent simply because her costs are 3x lower.

Rents are about 50% lower in Tokyo than in NYC. It's an even bigger and more crowded city. But there is simply far less restriction on building housing and so much more supply.

[Josh]

Can you explain how if a city is more “efficient” it costs so much more to occupy a much tinier piece of land?

Housing costs are only one aspect and reflect the increased economic efficiency of a city because they reflect the increased demand

If you have any kind of skilled profession you have a much larger market for your skills within a city
If you have unskilled labor you are more likely to find demand for it in a city
If you have any kind of specialized business, you have a much larger market for your products or services within a city, and you are more likely to find employees with specialized skills.
If you have any kind of interests beyond being outdoors you are more likely to find them in a city (books, music, art, other special interests)
If you are building infrastructure (streets, bridges, libraries, etc.) you are likely to serve more people within a city.

There are reasons why rural areas have been depopulating around the world for the past century and cities are growing and not just in the US but globally. They are largely economic. And they are also due to the increased efficiency of all rural extractive industries from agriculture to fisheries and mining. For example, much of the great plains is now less populated today than at any time in the past 100 years.

I already documented that there isn’t a difference in median household incomes anywhere close to the difference in costs.

Likewise, the apartment style living you claim is so efficient costs an extra $1300 a month in common fees. The taxes are also higher. I didn’t document this, but utility costs (electric, gas, etc) are also higher in Manhattan. Basically everything costs more.

Meanwhile, median household incomes aren’t even double between the two census tracts. I don’t see this “efficiency” anywhere. I just see that owning an apartment is really high cost.

[ohio jones]

If you have any kind of skilled profession you have a much larger market for your skills within a city

If you have any kind of specialized business, you have a much larger market for your products or services within a city, and you are more likely to find employees with specialized skills.

And when everyone else seeks their fortune in the big city, those who remain have the market to themselves. They can charge a little less than the big city businesses, if you can even get them to come out to the small towns, thereby capturing most of the local customers. The cost of living is lower and the quality of life is higher. This is a very workable strategy in my experience.

[mike]

If you have any kind of skilled profession you have a much larger market for your skills within a city

If you have any kind of specialized business, you have a much larger market for your products or services within a city, and you are more likely to find employees with specialized skills.

And when everyone else seeks their fortune in the big city, those who remain have the market to themselves. They can charge a little less than the big city businesses, if you can even get them to come out to the small towns, thereby capturing most of the local customers. The cost of living is lower and the quality of life is higher. This is a very workable strategy in my experience.

What was that Yogi Berra quote from another thread? Nobody goes there anymore because of the crowds?

[Ken]

Can you explain how if a city is more “efficient” it costs so much more to occupy a much tinier piece of land?

Housing costs are only one aspect and reflect the increased economic efficiency of a city because they reflect the increased demand

If you have any kind of skilled profession you have a much larger market for your skills within a city
If you have unskilled labor you are more likely to find demand for it in a city
If you have any kind of specialized business, you have a much larger market for your products or services within a city, and you are more likely to find employees with specialized skills.
If you have any kind of interests beyond being outdoors you are more likely to find them in a city (books, music, art, other special interests)
If you are building infrastructure (streets, bridges, libraries, etc.) you are likely to serve more people within a city.

There are reasons why rural areas have been depopulating around the world for the past century and cities are growing and not just in the US but globally. They are largely economic. And they are also due to the increased efficiency of all rural extractive industries from agriculture to fisheries and mining. For example, much of the great plains is now less populated today than at any time in the past 100 years.

I already documented that there isn’t a difference in median household incomes anywhere close to the difference in costs.

Likewise, the apartment style living you claim is so efficient costs an extra $1300 a month in common fees. The taxes are also higher. I didn’t document this, but utility costs (electric, gas, etc) are also higher in Manhattan. Basically everything costs more.

Meanwhile, median household incomes aren’t even double between the two census tracts. I don’t see this “efficiency” anywhere. I just see that owning an apartment is really high cost.

Nowhere have I claimed that there is a free and open housing market in NYC or anywhere else. Obviously there is not, which is why prices are so high in NYC. Some of those market barriers are things like zoning and permit reviews. Some are things like rent control and other restrictions. One could do a deep dive into the NYC housing market and probably find 100 different factors that interfere with the free market in housing.

That is the main point I have been making all along. We don't have a free market for housing in this country. We are very very far from it and that is one of the biggest reasons why we have a housing shortage in many parts of they country and why it is so difficult for young people and young families to make a start today.

And I have also made the point that those barriers to the free market seem to biggest in liberal coastal cities than the interior or rural areas for a whole lot of additional reasons.

[Josh]

That is the main point I have been making all along. We don't have a free market for housing in this country. We are very very far from it and that is one of the biggest reasons why we have a housing shortage in many parts of they country and why it is so difficult for young people and young families to make a start today.

This simply isn't accurate, though. As I've pointed out over and over, there are no zoning or building restrictions where I live. You can build all the apartments, duplexes, highrises, etc. that you want (although past a certain size you will probably have to comply with state laws about water and sewer, and federal laws about environmental impact). Yet there isn't an appreciable building boom because of that. Virtually every residential building that goes up is a single family home. That seems to be what the "free market" wants.

Like everything else in major metro areas, housing is regulated (just like gas stations, restaurants, and any other kind of market). It's regulated because that's what the democratic process has led to. The people who live in these places don't want a complete "wild west" of a residential market for housing. They want some amount of regulation.

And I can't blame them, either. A lot of people want their neighbourhood to be stable and not suddenly turn into a place full of renters and duplexes or apartment complexes. It's completely valid to want to buy into a neighbourhood you can be reasonably assured will be stable and maintain the same character.