Erdmann Housing Tracker · Housing & Cities
TIER 5 Fri, 12 Jun 2026 16:34:27 +0000
Back of the envelope notes on scale ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # Facets of the Housing Crisis, A Series: Part 4 ### Back of the envelope notes on scale | | Kevin Erdmann --- | Jun 12 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- Let's look at scale here. In a previous post, I noted that in a paper by Ed Glaeser & Matthew Resseger, titled "The Complementarity Between Cities and Skills", they estimate that in cities that attract a lot of workers with college educations, each doubling in size is associated with about 9% higher incomes. Upgrade to paid Let's think about that using my visualization. An amply supplied market would line up with the red dots (if there aren't amenities related to dense urban cores) or the gray dots (if there are density amenities). What Glaeser and Resseger are saying is that, if the gray city doubles in size, incomes will rise, and housing expenditures will rise along with incomes. So, the average income might rise from $100,000 to $109,000, and the average home price would rise from about $330,000 to $360,000. | | ---|---|--- Figure 1 The average size of homes wouldn't increase 9%. In fact, the average home might get smaller to compensate for the higher costs of a dense city. But, in terms of nominal values, those changes are in the ballpark. Let's pull this back a bit to make the marginal numbers easier to compare. Let's say that if the city grew by 10%, incomes and housing expenditures would each increase by about 1%. $101,000 incomes and $333,000 homes. Now, let's say the city doesn't grow. Under shortage conditions, I would expect a 1% shortfall to raise _average_ rents about 2% and prices about 5%. That's is a function of demand elasticity - how much are households willing to pay when quantities change, and I think those estimates are within commonly cited ranges under these conditions. So a 10% shortfall would raise rents about 22% and prices about 63%. It also matches up with US data on various margins. I estimate the shortage to be 15 million units or more. That's about 10% of the existing inventory of homes. And national residential real estate value is inflated by more than 50% compared to the long pre-21st century norm. | | ---|---|--- So, the average home value in the city that has moved from gray dot to yellow dot or blue dot in Figure 1 will rise from $330,000 to a bit above $500,000. In either case, there are new households that either formed or intended to move into the city. Let's assume that the 10% of new households that are forming have the city's $100,000 average income, and the 10% of existing households that move away to make housing available for them have incomes that average about $80,000. This is roughly in line with statistics of the incomes of remainers and leavers in the American blue dot cities. After those families move away, the average income of the remaining households would be $102,000. No actual family has higher income. That's just the compositional shift from some families with below-average incomes leaving. So, the housing-poor city looks like it has an income trend of a real high-flying high-agglomeration city. Not growing raises local average incomes more than growing does, when your shortage is deep enough to create economic displacement of families with below-average incomes. This is, in a nutshell, a description of the Closed Access cities. New York and Los Angeles would probably have average income growth and average price growth if they had average population growth. San Francisco would probably be quite a bit above average. But, in every case, their growth rates have been very low. Much of the rise in average local incomes has been from the compositional shift of families leaving for economic relief. And, really, under shortage conditions, those elasticities are just the average. Under shortage conditions, the shortage creates a uniform premium on each home. It varies a bit from region to region, I think, but as a rough approximation, a 1% shortage will raise monthly rents by about $40 and it will raise the price of every home in the region by about $15,000. You can see in Figure 3 that Los Angeles has been a blue dot city since before 2008. There has been a small proportionate rise in home prices, but mostly, every home has, roughly, a $350,000 premium on it. | | ---|---|--- Figure 3 Using my estimates above, Los Angeles would probably need to grow something around 20% to get rid of its shortage premium. A million homes or so. (The region typically permits around 50,000-60,000, or so, annually.) Growing Los Angeles by 20% won't remotely come close to creating enough agglomeration value to make either Los Angeles incomes and definitely not real estate value, higher than they currently are. Keep in mind, on home prices, Glaeser and Resseger say 10% population growth would be associated with 1% income growth. A 10% housing shortage is associated with 50% home price appreciation or more. We are talking about an _order of magnitude_ difference between the effect of growth and the effect of blocked growth. Since the mortgage crackdown spread the shortage across the country, we now have other examples. Phoenix has about a $150,000 scarcity premium, which is associated with about a 250,000 unit shortage, which would require a bit more than 10% growth. | | ---|---|--- Figure 4 First, look at Phoenix from 2002 (blue) to 2005 (red). That was an unsustainable price bubble (caused by the housing refugees moving in from Los Angeles). But prices in Phoenix in 2005 reflect the way agglomeration purists think the Closed Access cities are priced. Remember how they always tell on themselves by focusing on the nicest, highest tier neighborhoods? LA is expensive because everyone wants to live in Santa Monica or Beverly Hills? New York is expensive because everyone wants to live in Greenwich Village? What they are describing, I suppose, is something like Phoenix in 2005. Or, even more of a steepening, because prices in Phoenix in 2005 didn't reflect the most expensive parts of the city becoming even more expensive. The whole city just became more expensive proportionately. Isn't it weird how nobody said about Phoenix in 2005 that it suddenly was on the agglomeration train? Nobody claimed that it was just, obviously, a case of the wealthy elites who all wanted to live in Scottsdale. No. Everyone called it a bubble. It was a bubble. But, my point is that during the period when the Closed Access cities have become more expensive, they have never looked like that. Look at Los Angeles in Figure 3. The main reason it has been more expensive is that every lot, from the lowest to the highest, has a uniform scarcity premium. The high tier valuations have never come as close to leading the price appreciation in the Closed Access cities as they did in Phoenix in 2005. So, why didn't they think that Phoenix had suddenly become a superstar city in 2005? Well, one reason is that incomes weren't rising. And, even though Phoenix has developed quite a shortage and quite a shortage premium, it hasn't reached the point yet where there is massive net negative domestic migration. Migration is definitely affected, but households generally are still making compromises within the stock of homes - delaying household formation, moving down market to lower rents, etc. So, in Phoenix, since there isn't a false signal of rising incomes, I don't think anyone thinks that bringing home prices down from their 2026 levels back to 2002 levels is going to create so much agglomeration value that Phoenix can't be affordable, regardless of how much they permit. There are a lot of cities that look like Phoenix now. We're all a little bit Figure 1 blue-dotted these days. Phoenix looks just like Los Angeles, New York, Boston, and San Francisco. The patterns are all the same. The gap is just larger in the Closed Access cities, and the expense moved high enough that one of the ways that families have coped is by moving away from those cities entirely - especially families with low incomes, for whom the $350,000 premium was especially hard to cover. The answer is actually the opposite of the oft-claimed conventional wisdom. If Phoenix, New York City, and Los Angeles all grow by 20%, agglomeration should add about 2% to local incomes in all cases. But, in New York City and Los Angeles, re-attaining their former out-migrants might lower incomes by twice as much. And, in every case, total real estate value, even after increasing the inventory of homes by 20%, will be markedly lower. The claim that New York City and Los Angeles can't build themselves back to affordability isn't just wrong. It has the sign wrong. Average incomes and average home values will drop there faster because the growth will put an end to the outmigration that has been responsible for the averages rising. The only reason this won't lead to big disruptions from declining nominal home values is because it will take 15 or 20 years to do it, and general inflation will push incomes and prices up while growth pushes them down. Upgrade to paid You're currently a free subscriber to Erdmann Housing Tracker. For the full experience, upgrade your subscription. Upgrade to paid --- | | | Like --- | | Comment --- | | Restack --- (C) 2026 Kevin Erdmann 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe