Does a Building Cartel Clarify Rising Rents?

To a person with an antitrust hammer, the whole lot appears to be like like a monopoly nail. In a latest Substack, antimonopoly campaigner Matt Stoller blames the rise in rents and anemic housing provide progress since 2007 on rising focus within the home-building trade, fairly than native land-use laws, an evidence he attributes to “noisy” YIMBYs. Is he proper?

Let’s begin with what he’s proper about. Plenty of markets have seen rising focus within the home-building trade since 2007. However this pattern is a results of acutely aware authorities coverage within the wake of the monetary disaster to control mortgage lending extra tightly, as Kevin Erdmann on the Mercatus Middle has ably documented. These insurance policies drove many builders out of enterprise. Erdmann’s work, which is absolutely according to the work completed within the Nineteen Nineties and early 2000s by Ed Glaeser at Harvard, Raven Saks Molloy on the Fed, Joseph Gyourko at Penn, and Invoice Fischel at Dartmouth, amongst many others, exhibits that the housing scarcity predates 2007, at the very least in lots of markets. Certainly, tight zoning guidelines have been fingered as a explanation for expensive, scarce housing since at the very least 1972.

The rise in builder focus is a more moderen phenomenon, which isn’t excellent news for the thesis that builder focus has pushed progress in rents. However Stoller has one different piece of proof: builders’ use of “land banks” to amass heaps and maintain them for later growth. He calls this proof of cartel habits:

Curiously, I believe there’s a cartelization impact occurring as nicely. Right here’s Toll Brothers CEO Doug Yearley a couple of years in the past:

‘We’re doing considerably extra third-party land banking the place we assign a contract to knowledgeable land banker, who then feeds us land again on an as-needed foundation,” Yearley mentioned. “After which, we’re doing joint ventures with both Wall Avenue personal fairness or with our buddies within the dwelling constructing trade, the opposite builders.’ (emphasis unique)

What precisely does that quote imply? I don’t know, but it surely appears type of loopy that enormous homebuilders could be doing joint ventures with one another on land acquisition, when that might very simply result in holding provide off the market and stopping smaller builders from competing to construct cheaper houses.

However neither “land banking” nor joint ventures are proof of cartel habits (deliberately withholding heaps from growth as a way to drive up new housing costs and income). Land growth is an extremely dangerous enterprise. It’s a must to attempt to gauge what market situations shall be in a few years as soon as your allow approvals have come via and the brand new models are move-in prepared, however in the meantime you’re taking over massive money owed that it’s important to begin paying again instantly. It is sensible to not develop each plot of land you personal immediately, whilst you observe the vicissitudes of the real-estate market and, if mandatory, journey out a foul patch. For a similar purpose, it could possibly make sense to unfold threat throughout a number of monetary companions who all share a long-term view.

Stoller cites a working paper by Johns Hopkins College economist Luis Quintero as proof that market focus in home-building is driving up housing prices. It’s a critical paper, but it surely additionally has some methodological limitations, which can clarify why it has apparently kicked round for seven years with out but passing peer overview. (It focuses on only a few East Coast markets, it defines housing markets in an unusually slim approach, and the instrument appears to be legitimate solely underneath the situation that it principally simply captures time developments, not cross-section variation, however then there could possibly be many omitted elements that share an identical time pattern.) Quintero might be proper that home-builder focus does cut back housing provide and lift prices, but it surely hasn’t been confirmed but, and it’s at greatest a minor issue in comparison with the zoning restrictions YIMBYs speak about.

As a strategy to visualize the controversy, I regarded on the supply Stoller makes use of for builder focus information (the share of the market managed by the highest 10). Then for every of those markets, I plotted the connection with the latest housing prices measure (“regional worth parities”) produced by the Bureau of Financial Evaluation. The result’s under.

The connection between builder focus and housing prices in these 50 markets is zero, utterly flat. Now, perhaps you may assemble a flowery causal mannequin in which you’ll tease out some small optimistic impact when you management for X, Y, and Z or web out some type of reverse causation, however this plot ought to give us a powerful suspicion that builder focus can’t be greater than a distant secondary or tertiary clarification for why some markets are extra expensive than others.

For example, the Cincinnati metro space is without doubt one of the most extremely concentrated markets (97.2 % market share for the highest 10 builders!), however one of many least expensive locations for housing (83.7 % of the nationwide common!). Seattle isn’t concentrated in any respect (59.4 % prime 10 share), however is sort of costly (154.8 % of the US common).

Now what occurs once we plot housing prices in 2022 towards probably the most generally used measure of native residential land-use regulation? You get this:

Now that’s a powerful correlation! You possibly can quibble with the causal story right here: perhaps high-demand markets are inclined to see housing prices rise and likewise attempt to undertake extra regulation, however even these different tales nonetheless find yourself affirming an impact of regulation on housing prices. Excessive-demand areas regulate provide to guard values for incumbent owners.

Not each downside within the American financial system is about lack of competitors, and never each coverage “answer” geared toward this non-problem will make issues higher. Stoller’s proposal to equalize credit score prices between massive and small builders will in all probability simply trigger everybody’s credit score prices to go up. Huge builders are higher dangers, so financiers will cut back lending if pressured to lend on the similar charges to massive and small builders. Extra expensive financing means… much less constructing and extra expensive housing. As an alternative, let’s take heed to the YIMBYs and legalize constructing in high-demand areas.