Last week, The New York Times reported on an Economic Innovation Group survey of Census Bureau data that showed several major cities have missed out almost entirely from the recovery. In Detroit, Memphis, and Toledo, the number of businesses declined between 2010 and 2013. In Cleveland and Cincinnati, total employment shrunk as well.
In other cities, however, the recovery has been so frothy that the housing market is back to its pre-crash highs. Jed Kolko, a housing analyst, recently compared real home prices to their all-time highs in the 121 largest metros. He found that, adjusting for inflation, only seven metros tied their pre-crash record-high housing prices. They are:
- San Francisco
In three other metros, prices are within 5 percent of their all-time highs:
- Durham-Chapel Hill
- San Jose
That's 10 cities with home prices at or extremely close to their all-time highs, and they have something else in common, too: Young, college-educated adults—lots of them. San Francisco and San Jose are two of the top four cities in density of college grads, and the Research Triangle is close behind. The four cities with the greatest recent increase in 25-to-34-year-old college graduates since 2000 are all there, too (Houston, Nashville, Denver, and Austin). Two more, Buffalo and Pittsburgh, are less famous magnets for fresh diplomas, but they rank 7th and 10th in percentage growth in college grads this century.
The return of record-high home prices in metros rich with new college grads is both an achievement and a warning. It’s an achievement, because there is a strong relationship between long-term growth and cities that assemble smart people. The economist Enrico Moretti estimated that every college graduate in a new industry eventually creates five more jobs.
But it’s a warning, too, because long-term growth requires that those people can afford to stay in the city. Vertiginous housing prices, which afflict San Francisco and San Jose and Manhattan and Brooklyn, are a drag on long-term productivity.
There are some good reasons why expensive cities tend to be on the water. It's hard to builds apartments on the ocean. But restrictive housing policies—for example, height restrictions and rules prohibiting the construction of new homes or multifamily housing— are a man-made tax on agglomeration, pricing smart people out of places they want to live and the places where they could best work. This, in turn, deprives some cities of the very job multiplier that Moretti hailed. And so, cities that constrain their housing supply to maintain a certain urban aesthetic end up constraining much more—productivity, jobs, and wage growth.
This isn't a concern on the level of a city, but of the nation as a whole: In the 2016 Economic Report of the President, the Council of Economic Advisers identified housing constraints as one of the reasons why household formation—one of the key indicators of future economic growth—is so low among 20- and 30-year-olds. Some of the best educated couples have to wait to get married and have a family, because they simply can’t afford to buy in their zipcode. As the report says:
Supply constraints provide a structural challenge in the housing market, particularly in high-mobility, economically vibrant cities. When housing supply is constrained, it has less room to expand when demand increases, leading to higher prices and lower affordability. Limits on new construction can, in turn, impede growth in local labor markets and restrain aggregate output growth.
Presidential candidates are bound by the traditions of their craft to never admit that there are major problems outside of their control. They are contractually required to have a solution to turn Syria into a capitalist democracy and stop global warming in the Arctic. But when it comes to raising productivity and real income growth, housing policy matters—and is mostly the province of state and local policymakers. The chief executive of the country can raise awareness of how housing constraints can choke wage and productivity growth. But taking action is mostly outside of their control. Making America great again is a local job.