Housing supply, rents, and economic mobility

Jason Furman by Charles Dharapak, AP Photo

The debate about the causes of declining geographic mobility in the United States continues apace with a new contribution from Jason Furman, chairman of the President’s Council of Economic Advisers. In a speech to the Urban Institute last Friday, Furman suggested that the restriction of zoning supply in metropolitan areas is not only a force for pushing down mobility rates, but also a source of higher inequality and lower productivity growth.

Stitching together a number of research papers, Furman lays out the following narrative: Tighter restrictions on land use in some cities reduces the supply of housing, boosting housing prices in those areas. And the higher housing prices increase inequality by boosting the value of homes of incumbent homeowners while throwing up a barrier to prospective residents who want to move in.

That last part is worth digging into more.

Furman says that higher rents reduce the payoff of moving to a new location. Consider, for example, a person who might want to move from San Antonio to San Francisco. She might be able to get a higher-paying job in San Francisco. But if the rent there is much more expensive, her disposable pay may not be that much higher than it would be in San Antonio. Why move to a new city if rent is going to eat away your raise?

Furman also points out that the decline in migration started at the same time as the increased regulation of land use around 1970. But it’s unclear how much of the decline in mobility can be laid at the feet of higher housing costs.

Furman cites research by economists Raven Malloy and Christopher L. Smith of the Federal Reserve, and Abigail Wozniak of the University of Notre Dame, showing a decline in moves from state to state, moves from one county to another county in the same state, and moves within a county. Research by Equitable Growth’s Marshall Steinbaum also shows that most moves in the United States are relatively short. High rents, however, are an unlikely explanation for why workers are less likely to move within a county as opposed to moving across state lines. As Furman notes, declining migration has many causes and the research has yet to untangle the relative importance of factors.

On the topic of inequality, allowing for more construction in high-demand urban areas might not unambiguously decrease inequality. If more buildings can be built on a given piece of land, the value of the land will increase even more. An individual apartment will rent for less, but the overall profits from owning the land will go up because there are now more apartments. As a result, the economic rent going to the people who own the land might go up. The share of economic output going to land instead of capital or labor would rise as disposable income for renters rises.

Now, there very well could be significant gains and improvements for the U.S. economy by lowering housing prices. Workers would be able to move to cities that they might not to be able to afford otherwise. But it’s worthwhile to kick the tires on this story to get a sense of just how much we would actually reap.