August 21, 2017

Is America's Housing Too Durable?

Adam Millsap

Senior Affiliated Scholar

Housing in America typically lasts a long time. In 2015, 13% of all housing units were built prior to 1940 and 56% were built prior to 1980—compared to 40% in Japan—according to American Community Survey data.

This durability has benefits: Durable housing is resistant to extreme weather, can serve as a store of wealth, and makes the filtering process—when older housing filters down to people with lower incomes through market transactions—a viable source of low-income housing. But durability also has drawbacks that may be harming the U.S. economy.

Economists have linked urban decline to the durability of housing. When cities experience a large negative productivity shock—e.g. Detroit and the automobile industry—a lot of the shock is manifested in the form of declining home prices rather than population loss.

This happens because homes disappear slowly. As employment opportunities disappear and home prices decline, those most able to move—often higher-income, more educated people—do so. They leave their homes behind, but the still-livable-but-now-much-cheaper homes attract lower-skill people who are less connected to the labor market. This changes the skill composition of the city’s workforce and contributes to further decline.

The result is that urban decline is a long-drawn-out process relative to urban growth: Many declining Midwestern and Northeastern cities maintain sizable populations despite six-plus decades of population loss, little to no improvement in economic opportunities and the absence of any convincing signs that things will get significantly better anytime soon.

On average, people who remain in or migrate to declining cities don’t contribute as much to the national economy as people in more productive cities, due to the knowledge spillovers and other agglomeration benefits that increase productivity—and wages—in the latter. If housing deteriorated more quickly, there would be less of an incentive for people to move to or remain in declining cities.

And since only a portion of the movers are replaced, the durability of housing creates another problem in declining cities—vacant buildings. There is a common belief that buildings left standing but abandoned become hubs of illicit activity and further erode nearby property values. As a result, governments at all levels collectively spend hundreds of millions of dollars each year to demolish vacant structures.

New research that examines demolitions of single-family homes in Saginaw, MI at the block level finds evidence that eliminating vacant homes does in fact reduce crime. The author finds that demolishing vacant or blighted homes is associated with a 7.5% reduction in total crimes per month. The drop can be seen in the figure below from the paper, which displays the average number of monthly crimes before and after demolition. These findings hold when the data are analyzed using more complicated techniques.Stacy, Christina Plerhoples. "The effect of vacant building demolitions on crime under depopulation" Journal of Regional Science

The horizontal axis displays the months since demolition (0 is when demolition takes place) and the vertical axis displays number of crimes. The crime-reducing effect spills over into nearby neighborhoods as well: The author finds that total crimes fall 5.1% in neighborhoods adjoining those where demolitions took place.

Housing that is less durable would also be cheaper, since less durability means cheaper materials and a shorter stream of housing services. Such housing could lead to more geographic mobility when the surrounding economy declined, since people would be more willing to take a smaller loss on cheaper homes that make up a smaller portion of their overall wealth than homeowners are today.

Cheaper, less durable homes would also make poorer investments than today’s homes. This would likely lead to less land-use regulation, since there is convincing evidence that most of the strictest land-use regulations result from homeowners trying to protect their most valuable asset.

The increase in land-use regulations since the 1970s has hindered housing construction in many areas and made it difficult for people to move to the most productive cities. This misallocation of workers across cities—too many in low-productivity cities like Flint and Buffalo and too few in high-productivity cities like San Francisco and New York—has hurt overall economic growth.

Why, then, is Japan’s housing stock younger than America’s? There appear to be multiple reasons for this, some of which overlap with America and some that don’t. And though some economists and Japanese officials think this is a problem for Japan, a shift towards less durability might provide more benefits in America since our geographically large and diverse economy relies more on the mobility of labor to alleviate regional recessions than smaller countries like Japan. (For space’s sake I won’t go into all the details of why that matters here, but Mercatus’ David Beckworth has a great blog post about it.)

For now, just know that it’s important for people to move toward economic opportunity in America, otherwise local recessions will persist: There is evidence that it can take a generation for local economies to even partly recover from a negative economic shock when out-migration is low.

Why, then, is Japan’s housing stock younger than America’s? There appear to be multiple reasons for this, some of which overlap with America and some that don’t. And though some economists and Japanese officials think this is a problem for Japan, a shift towards less durability might provide more benefits in America since our geographically large and diverse economy relies more on the mobility of labor to alleviate regional recessions than smaller countries like Japan. (For space’s sake I won’t go into all the details of why that matters here, but Mercatus’ David Beckworth has a great blog post about it.)

For now, just know that it’s important for people to move toward economic opportunity in America, otherwise local recessions will persist: There is evidence that it can take a generation for local economies to even partly recover from a negative economic shock when out-migration is low.

So while stability is good, mobility is too, and striking the right balance between them may require housing of different types and levels of quality. This doesn’t mean American should become a country of shanty towns, but there’s probably room for relatively cheap housing that is built to last 15 to 20 (or even 30) years instead of 50 to 100.

So why don’t we have more cheap housing? I don’t have a definitive answer, but here are some thoughts.

First, the same policies that encourage homeownership—e.g. the mortgage interest deduction—also encourage the use of homes as long-term investments, which means they need to last. Second, local control of zoning means that motivated groups of homeowners can actually protect their housing investment via land-use regulations. If zoning was controlled at the state level this sort of protection would be harder, which would make housing less attractive as an investment and may make people care less about its durability.

Third, culture: A home is a crucial part of the “American Dream” and as such we believe it should be built to last. Fourth, building codes and other government policies that emphasize safety and durability likely play a role. Or perhaps more durable housing really is just better, though I’m not totally convinced.