The middle class is getting priced out of liberal cities, while red-state urban areas remain affordable. Does that mean our cities should be less like tightly regulated San Francisco and more like permissive Houston? It’s a common argument – but it doesn’t fit the facts.
To start with, Houston is hardly a paradise of deregulation. In practice, local experts explain, the city limits new building with a heavy hand. Zoning (thinly disguised as a special form of deed covenant) is in some ways even tighter than elsewhere — a subdivision can downzone itself by vote of its homeowners, even when a minority objects, and the elected city government has no power to override neighborhood decisions.
If the Houston housing market is no freer than San Francisco’s, what explains the lower prices in Texas? Supply and demand set house prices, and demand (the lack of which makes housing so affordable in Detroit) is strong in Houston.
These price comparisons have a buried conceptual flaw. They look at the average of all houses in the region, new and old. But the added supply that demand calls forth (what economists refer to as “at the margin”) consists of new houses alone. A shortage of supply should show up, most directly, in the price of new houses.
In American urban areas, most land is reserved for single-family houses. Close-in locations fill up first, so the marginal unit of supply is a newly built detached house on the exurban fringe.
How much does that new house cost? The table below shows the asking price (from Zillow) for a minimally featured new 3-bedroom, 1750-square-foot house on the outskirts of some major cities, along with the median sale price of single-family houses throughout the area. Affordability is measured by the ratio of house price to the metropolitan area’s median household income. The areas were selected to have around the same population, so that the commute (a painful one in all cases) would be a comparable deterrent to living at the fringe.
||Median house price (000)
||Ratio to median income
||New 1700 sq ft house price (000)
||Ratio to median income
||Charles Town WV
These figures will surprise many. The choice of fringe locations is certainly open to discussion, but there’s no question that the affordability of new single-family houses varies among cities far less than the average house price. If you insist on a brand-new house and don’t mind a long commute, San Francisco is as affordable as Houston.