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>Today's luxury apartment is tomorrow's affordable one That isn't necessarily true. It is most obvious when a neighborhood is experiencing gentrification. Fo

by slg 8y ago

>Today's luxury apartment is tomorrow's affordable one That isn't necessarily true. It is most obvious when a neighborhood is experiencing gentrification. For example, imagine a SRO hotel in which the rooms are no more than one or two hundred square feet. Buildings like this used to be incredibly common in the Skid Row neighborhood of Los Angeles and multiple neighborhoods in San Fransisco. Many of those buildings are being knocked down in order to replace them with high-rise luxury condos. Since the new buildings are high-rises replacing much smaller structures, the new units can have several times more space per unit and still increase the density of the lot. The problem is that a 1000 sqft unit with amenities like an in unit washer and dryer is never going to drop to the price of a 200 sqft SRO room that doesn't even have an in unit toilet and shower. The new and old homes are so far apart that they don't behave like they are part of the same market.

reaperducer 8y ago
And on the other end of the same point, not all luxury residential buildings become affordable. Case in point: The John Hancock Center in Chicago. 700 units of luxury living since 1969. Apartments may depreciate, but in a good number of cases condos don't get any cheaper.
- Consultant32452 8y ago
  As a thought experiment, imagine the city tore down every other building in Chicago and filled every square inch of real estate with cookie cutter copies of the John Hancock center. The number of total available units in the city would skyrocket. Do you believe per unit price would remain the same?
  - slg 8y ago
    The per unit price would obviously drop compared to the existing John Hancock Center. The per unit cost citywide might drop (I don't have enough information about Chicago to say for sure, but it is certainly feasible). But it is unlikely that any of these new units would be as cheap as the cheapest units that currently exist in Chicago. That is a problem that this market approach to affordable housing doesn't solve. Housing isn't a single market in which every unit is interchangeable. You need a wide variety of different housing options in order to house a wide variety of people.
    - Consultant32452 8y ago
      Obviously in a real scenario different types of housing would be built. But if you increase the supply of total housing by 20x, then I feel confident some housing would be cheaper than the current cheapest housing. Even if that just means the current cheapest housing becomes cheaper than it is today. If you doubt this would happen at 20x, don't let me stifle your imagination. There could be 50x or 100x more units. Do you honestly believe there is no amount of supply that would result in significant housing price drops, even at the low end?
      - slg 8y ago
        I am not sure what point you are really getting at here, but sure, if you increase the housing supply 100x there would be a significant drop in housing costs. I don't know how admitting to that fact impacts the real world considering actual growth rates are probably 4 orders of magnitude smaller. My original point still stands that we can't just leave things up to the market to fix the bottom of the housing market.
        Consultant32452 8y ago
        Ok, so we agree that at 100x the current supply the price would drop. What is stopping builders from creating 100x supply? There's only two things I see that make sense as answers here. One is regulation/zoning. Let's assume we could fix that. The second would be if the sale price dropped below the nominal cost of constructing new units, with some wiggle room in there for opportunity cost to builders who might make more money by choosing to build elsewhere. Do you believe that's the case currently in NYC, Chicago, etc? Is the price so low that it's not even worth it for builders to bother creating new units, because they couldn't recoup their costs?
        slg 8y ago
        >The second would be if the sale price dropped below the nominal price of construction new units, with some wiggle room in there for opportunity cost to builders who might make more money by choosing to build elsewhere. You also have to factor in the opportunity cost of the land/unit too which is where the argument starts to fall apart. Why build a unit that rents for $X when you can increase your build costs by Y% and charge a rent higher than $X + Y%. That is why new construction generally comes in at or near the top of the market. Construction costs generally don't make up most of the costs of new homes in places like San Francisco, Chicago, or Los Angeles. But sure, if you want to create a world with no zoning laws and with 10000% increase in housing supply, I am sure it will solve all the problems with pure brute force.
  - reaperducer 8y ago
    At the Hancock Center? Yes. People pay a premium to live there because it's near shopping and jobs and transit and the lake. Crap neighborhoods will continue to be crap, just with cheap housing that nobody wants to live in. People aren't water. They don't flow to any available crevice. They go where the stuff they need and want is.
zaroth 8y ago
Another thing the new luxury unit does is it reduces competition for the units just below it on the value chain from wealthier buyers who now have more options at the higher scale. This effect cascades all the way down the price curve. In macroeconomic terms, increasing supply shifts the whole curve below that point. This is true so long as the new supply isn’t itself causing new demand, e.g. foreign investors leaving the unit empty.
- slg 8y ago
  >This is true so long as the new supply isn’t itself causing new demand Which is where your argument falls apart. Cities aren't closed systems. The price reductions won't trickle down to the bottom of the market because at some point there is always going to be people who are willing to move in from neighboring neighborhoods, cities, or regions. It isn't like the only people who live in San Francisco are the only people who can afford it. There are plenty of people who could afford the worst possible home in San Francisco but decide not to move their because they can't afford a home they want. Once those middle of the market prices come down, people will move in to fill that new supply.

by slg 8y ago

reaperducer 8y ago

And on the other end of the same point, not all luxury residential buildings become affordable. Case in point: The John Hancock Center in Chicago. 700 units of luxury living since 1969. Apartments may depreciate, but in a good number of cases condos don't get any cheaper.

Consultant32452 8y ago
As a thought experiment, imagine the city tore down every other building in Chicago and filled every square inch of real estate with cookie cutter copies of the John Hancock center. The number of total available units in the city would skyrocket. Do you believe per unit price would remain the same?
- slg 8y ago
  The per unit price would obviously drop compared to the existing John Hancock Center. The per unit cost citywide might drop (I don't have enough information about Chicago to say for sure, but it is certainly feasible). But it is unlikely that any of these new units would be as cheap as the cheapest units that currently exist in Chicago. That is a problem that this market approach to affordable housing doesn't solve. Housing isn't a single market in which every unit is interchangeable. You need a wide variety of different housing options in order to house a wide variety of people.
  - Consultant32452 8y ago
    Obviously in a real scenario different types of housing would be built. But if you increase the supply of total housing by 20x, then I feel confident some housing would be cheaper than the current cheapest housing. Even if that just means the current cheapest housing becomes cheaper than it is today. If you doubt this would happen at 20x, don't let me stifle your imagination. There could be 50x or 100x more units. Do you honestly believe there is no amount of supply that would result in significant housing price drops, even at the low end?
    - slg 8y ago
      I am not sure what point you are really getting at here, but sure, if you increase the housing supply 100x there would be a significant drop in housing costs. I don't know how admitting to that fact impacts the real world considering actual growth rates are probably 4 orders of magnitude smaller. My original point still stands that we can't just leave things up to the market to fix the bottom of the housing market.
      - Consultant32452 8y ago
        Ok, so we agree that at 100x the current supply the price would drop. What is stopping builders from creating 100x supply? There's only two things I see that make sense as answers here. One is regulation/zoning. Let's assume we could fix that. The second would be if the sale price dropped below the nominal cost of constructing new units, with some wiggle room in there for opportunity cost to builders who might make more money by choosing to build elsewhere. Do you believe that's the case currently in NYC, Chicago, etc? Is the price so low that it's not even worth it for builders to bother creating new units, because they couldn't recoup their costs?
        slg 8y ago
        >The second would be if the sale price dropped below the nominal price of construction new units, with some wiggle room in there for opportunity cost to builders who might make more money by choosing to build elsewhere. You also have to factor in the opportunity cost of the land/unit too which is where the argument starts to fall apart. Why build a unit that rents for $X when you can increase your build costs by Y% and charge a rent higher than $X + Y%. That is why new construction generally comes in at or near the top of the market. Construction costs generally don't make up most of the costs of new homes in places like San Francisco, Chicago, or Los Angeles. But sure, if you want to create a world with no zoning laws and with 10000% increase in housing supply, I am sure it will solve all the problems with pure brute force.
- reaperducer 8y ago
  At the Hancock Center? Yes. People pay a premium to live there because it's near shopping and jobs and transit and the lake. Crap neighborhoods will continue to be crap, just with cheap housing that nobody wants to live in. People aren't water. They don't flow to any available crevice. They go where the stuff they need and want is.

zaroth 8y ago

Another thing the new luxury unit does is it reduces competition for the units just below it on the value chain from wealthier buyers who now have more options at the higher scale. This effect cascades all the way down the price curve. In macroeconomic terms, increasing supply shifts the whole curve below that point. This is true so long as the new supply isn’t itself causing new demand, e.g. foreign investors leaving the unit empty.

slg 8y ago
>This is true so long as the new supply isn’t itself causing new demand Which is where your argument falls apart. Cities aren't closed systems. The price reductions won't trickle down to the bottom of the market because at some point there is always going to be people who are willing to move in from neighboring neighborhoods, cities, or regions. It isn't like the only people who live in San Francisco are the only people who can afford it. There are plenty of people who could afford the worst possible home in San Francisco but decide not to move their because they can't afford a home they want. Once those middle of the market prices come down, people will move in to fill that new supply.