Wednesday, April 4, 2012

Price drops aren't always forever

A few months ago I came across the notion of "filtering" on Charlie Gardner's Old Urbanist blog. It's an idea that's fairly well established in real estate economics, based on the observation that a lot of cheaper buildings are old and run-down. The theory is that the older a building is, the harder it is to maintain. The owners don't maintain it all that well, so it deteriorates, and no longer fetches as high a price or rent. The notion is usually the basis of an argument that adequate affordable housing doesn't require subsidies or mandates; we just have to wait for the housing to age and the market will take care of it.

As Charlie pointed out, this doesn't make any sense. Filtering is a very nice theory, but it really doesn't seem to match the data very well at all, and I expect that it will match it less and less well as time goes on. Charlie suggests that "the process of filtering, at least for initially high-income older neighborhoods, was a temporary result of rapid suburban dispersal in the 1940-1970 time period, and since that time has been steadily reversed."

Take the Grand Concourse in the Bronx for example. It was "the Park Avenue of the Bronx" when it was built, lined with large luxury Art Deco apartment buildings. Real prices and rents declined after World War II, and in 2000 you could get a two-bedroom apartment with hardwood parquet floors and a sunken living room for under $800 a month. Now those apartments go for $1500-2000.

It's true that most of those buildings were not well-maintained, but the causation is more likely the other way around: the landlords didn't put a lot of money into them because they didn't bring in much rent. So why were the rents so cheap? I'm guessing that there were several related factors: racism, city services, crime, noise, fads and the suburban ponzi scheme.

First, there are a lot of racists out there who don't want to live near black and Puerto Rican people, and if anything there were more fifty years ago. That reduces prices and rents anywhere near where black and Puerto Rican people live, which can be a good deal if you're not a racist. The problem is that the city was run by racists and by people who spent money where the rich and powerful people lived, and when the rich and powerful people moved away from the South Bronx, the city cut back on street sweeping, garbage pickup and other services. Most notably, it cut back on policing. At the same time the drug booms fueled by crack and other substances brought money and power to criminal gangs that lived in those neighborhoods. Some people (usually poor) seem to mind less when there's a lot of noise around from amplified music and other activities, but when the people who do mind move away, that lowers home prices and rents even more.

Finally, at that time it was "the thing to do" to move to the suburbs and buy as big a house on as big a piece of land with as big a car as you could afford. The suburban ponzi scheme described so well by the StrongTowns crew made housing cheaper in the suburbs than it needed to be to cover the amount of services that the municipalities were providing. All those factors made housing cheap in the Bronx, in Harlem, in Williamsburg and in Fort Greene.

Now those factors are reversing one by one. The suburban ponzi scheme has mostly burnt itself out. "The thing to do" is now to move back to the city and live in an apartment. The drug boom has subsided, and crime is much more under control. People may be less racist. So middle-class white people move back to the city, the noise levels go down, the city starts spending more money in the neighborhoods and the black and Latino people can't afford to live their any longer. Prices go up.

A lot of the anger over gentrification comes from the fact that the poor black and Latino people who lived in these neighborhoods for fifty or sixty years thought that the change was permanent. They thought that this was now their territory. Sure, they had to put up with crime, noise and dirty streets, but they got big apartments with parquet floors in Art Deco buildings on the Grand Concourse, and brownstones in Fort Greene and Harlem. They never thought anyone but them would want to live there again.

Is it fair that poor black and Latino people can't afford to live in these neighborhoods any more? Probably not. It wasn't fair when the neighborhoods were built and their grandparents couldn't afford to live in them. But the solution is not to keep the neighborhoods dirty, noisy and dangerous. As Matt Yglesias says, the best way to bring down the price of housing is to build more of it. And as I said last month, the best way to make sure that we have affordable housing that isn't dangerous or inaccessible is to build lower-quality housing alongside the high-quality housing.

1 comment:

Charlie Gardner said...

Thanks for the mention, Cap'n. The 1970 date marks the earliest phase of widespread revitalization in older neighborhoods and the emergence of some of the first historic districts, but obviously other areas continued to decline after that point (the Bronx which you've mentioned being probably the best example, which was being abandoned even as Soho was starting down the path to the place it is today).

As far as incorporating cheap housing alongside more expensive homes, freeing up development can make a difference. Austin Contrarian linked an article about Houston showing how the downtown neighborhood of Montrose, which is undergoing intense redevelopment, has a gap between rents among Class A and B residential properties that is "probably the widest in the country," at 38%.

It's not enough to keep pace with demand there (IMO nothing is, if living preferences change substantially and a neighborhood gets "hot"), but it does preserve a wide range of rent options even where prices overall are rising rapidly: