The Dangerous Economist: How new apartments create opportunities for all

Wednesday, April 03, 2024

How new apartments create opportunities for all

By Tyler Boesch, Erik Hembre & Ben Horowitz of The Federal Reserve Bank of Minneapolis. Excerpts:

"Who benefits from new market-rate apartments? While these new units are typically occupied by households on the higher end of the income spectrum, the chain of residential moves brought about by their construction benefits many more households. Today’s lower-priced rental housing was often the new, expensive rental housing of yesteryear. And it doesn’t take decades for new apartments to put downward pressure on rents elsewhere in a metropolitan area. New units help keep current prices down for everyone by opening up new opportunities for low- and moderate-income renters over a few short years through a chain of residential moves.
Imagine that a renter named Jim moves into a brand-new market-rate apartment. A renter named Maria moves into Jim’s old unit, which is more affordable than Jim’s new place. Another renter is going to move into Maria’s old unit. The chain will likely continue to include several more units, each progressively older and more affordable. It will end when someone moves out on their own from a previously shared living space.

This process of new construction encouraging mobility across the income spectrum is one piece of a phenomenon known as filtering. Theories connecting filtering to housing affordability are generally accepted among economists. For example, economic theory predicts that housing units should be relatively more affordable when the housing supply increases, as it does when new apartments open.
Owners and managers of older properties are well aware that new supply entering a market creates new opportunities for their renters to move up."
"owners and managers often cited the increased housing supply in the region as a reason why rents at their properties generally had not increased very much in the past few years.
Evidence from economist Evan Mast, who is currently with the University of Notre Dame, has helped clearly track and document how filtering works at a granular level."
"within five years, the aggregated chain of residential moves ultimately results in about 70 new openings for renters in lower-income neighborhoods for every 100 new market-rate apartments."
"The rate at which properties filter through a housing market isn’t set in stone. Lower growth in a city’s housing supply leads to less filtering for all housing units. Unless there’s a huge drop in demand for housing, cities that don’t add to their housing supply will see more competition for fewer homes, and prices and rents will increase more quickly than they otherwise would."
"Analysis by Liyi Liu and others at the Federal Home Loan Mortgage Corporation shows that filtering happens more slowly in places with more restrictions on construction. In places like San Francisco, filtering can even happen in reverse. When there are few homes relative to demand, older homes are more likely to be bought by higher-income households over time. This doesn’t just apply to Victorian-era mansions, but also to the less amenity-rich housing stock that used to be more accessible to first-time home buyers."
"Mast’s paper echoes research showing that high-income movers tend to create more opportunities through filtering than they take away through gentrification. His work also shows that the people who move into new housing in lower-income areas are most likely to come from other low-income neighborhoods. In a separate paper, Mast also finds that rent growth is actually slower in low-income neighborhoods after new market-rate apartments are built."
"The easier it is to build new housing, the more opportunities low- and moderate-income households will have to experience housing affordability."