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A moment's study of NYC real estate over the last thirty or even 300 years is sufficient to disabuse one of the explanatory power of supply and demand, except i

A moment's study of NYC real estate over the last thirty or even 300 years is sufficient to disabuse one of the explanatory power of supply and demand, except in a very broad macro trend sense that ridiculously oversmoothes the actual data. Especially recently, right up to COVID times. There were hundreds of thousands of empty living spaces, even more vacant commercial spaces, and virtually no changes in prices. An important insight is that there are very few markets in the world. Most transactions take place in a context where the players have been playing for a very, very long time, and the game is optimized for the repeat participants. These are mostly cartel games, private contracts among the heavies. Not markets. In particular, real estate in New York is a subsidized game of capital and patience. It has been so since the 1700s. At this late stage there are only benefits and virtually no penalties for holding a property vacant. Property taxes are vanishingly low. Claims of loss from vacancy are used to reduce business taxes. I could go on but you really should do your own research. It astonishes me that people can be so convinced by a model, especially such a facile one, as to disregard actual data. Best wishes to you.

julianeon 6y ago
This is an interesting perspective, thanks for sharing. It makes sense but I would've never guessed this on my own.
Consultant32452 6y ago
Someone wanting to purchase and hold NYC real estate is still demand that would have to be outpaced in order to reduce prices. If you could somehow wave your magic wand and over night there could be 100x as many total units in NYC, do you believe prices would hold steady? Of course magic isn't real, it's just about questioning whether, in principle, there is some threshold past which the price would drop. If so, the model holds.
- jonahbenton 6y ago
  Sure- in the framing of- all models are wrong, some are useful- that sort of model may even be right, but it would fail to be useful. Fair? I don't disagree in principle with supply and demand, my point was rather that as a model it explains very little about New York City real estate, and if one insists on it as an explanatory tool, one will have to throw out nearly all of the data, which what makes it interesting to study. Various accounting fictions drive a lot of asset pricing. Not fictions in the sense of being false, but rather in the sense of being complicated narratives woven for various purposes that, at the end of the day, are just made up. Real estate is absolutely FULL of these, and they tell a much richer pricing story. Taking the hypothesis of 100x increase in supply- if we are able to poke at that magical occurrence, put it into context, provide some facts and reasoning behind it- we can see circumstances under which it either lowers or raises prices. I mostly see ways in which it raises prices. If the increase in supply was executed by adding to the inventory of one of the monster private owners in NYC- you can be damn sure there would be no sudden drop in pricing of the rest of their inventory, and dollars will go into tuning the machine- tax and reporting rules, interesting ways of structuring new inventory into new assets- so as to allow them to reallocate their ownership in ways that they deemed most advantageous. If the supply increase were executed by magically growing the inventory of city-owned property- you would also probably not see much in the way of price decrease. Why? The city will have the additional burden of maintenance for an enormous new footprint, for water, sewer, public transportation, etc. Huge capital investment would be required, which would require more population, and some sales. But the city will not make that inventory available in any way that would impact prices for other owners. Fund it with debt, keep prices steady, set up special programs to grant the properties, locked in to prevent fast turnover, to new owners who have to move to the city, and look forward to growing flows in the economy in the future. A way in which it might lower prices is if magically ownership of these new properties was distributed among existing renters or small property owners. This is closest to the behavior of an actual market, which describes NYC less and less as more and more of the footprint is held by large interests. But individuals would be forced with a choice of- leave their current space, or shed this new space, both of which would lead to various price depressions. But in the scheme of things, I see this as least likely. Even genies are lazy, and would prefer one large transaction to millions of small ones. Cheers.
jjeaff 6y ago
You describe a supply demand explanation of property as facile. But none of the reasons you give explain why keeping a property vacant is of no consequence to owners. A business deduction due to losses will only reduce your losses by your tax rate. Mortgages on those properties must still be paid. Then of course there is opportunity cost. Vacancy is tolerated to an extent by landlords in hopes of getting a higher rent and also a better renter. Especially in places like NYC where eviction can be costly and time consuming. Most of these extra factors are due to government regulations that are in affect manipulation supply and demand economics. I seriously doubt there are widespread cases of vacant properties actually being desirable or even tolerable for very long in places like NYC.
- jonahbenton 6y ago
  Thank you- With respect, "government regulations" doesn't begin to capture the dynamics, and IMO is not the right way to understand the ecology. An assumption underlying supply/demand from an economic and game theory sense is win/win- producers want to produce, consumers want to consume. Supply/demand- or really any- mechanism design breaks down when there are vast discrepancies in "power" between the actors, when some actors can change the levers on the mechanism, when actors have substantial incentives for sabotage, when the interests of the actors are simply in opposition. In real estate, owners and dwellers are, to a much greater degree, entities in opposition to one another, and only to a small degree, united in a common interest. Just one example- much of NYC's population is elderly, on a fixed/unindexed income. They simply cannot participate in a dynamically priced housing regime. There is an extensive history of owners preying on this population. If one reads stories of old New York, one sees that the vignette in The Godfather II where the young Vito Corleone strongarms an owner into keeping on an elderly tenant was extremely well chosen. Similarly, on a farm, children used to be a highly economic investment. In a city, children have become about the most uneconomic investment a family can make, to a degree because of de facto cartel behavior on the part of owners, where pricing per sq foot differs substantially by bedroom count. The presence of elderly and children must be optimized for for a city to exist at all, as the income producing working adults have both in their vicinity. From a pricing perspective it used to be that rent control and rent stabilization kept prices low for certain segments of the population. Stable/low prices are, to put it mildly, not a desirable opportunity for owners. This game was remachined with things like section 8 housing vouchers. Rather than prices being stable, they can "float" with the "market" (I use the term "market" loosely as there are a rich spectrum of techniques to shift what is considered market pricing). Tenants who pass through a gate are limited in what they have to pay to 30% of their income. The gap between 30% of income and "market price" is paid to owners by the federal government. And so on. Much more could be- and has been, of course, by people much better suited than me- on evictions, or money laundering, or any number of other subplots. Real estate is a balancing act, by governments, between the needs of what amount to predator/prey populations. In regards to the latter point- doubts about widespread cases of vacant properties being tolerable/desirable- forgive me, you evidently have not been here. Just one point in time snapshot for one segment of the city: http://www.vacantnewyork.com/ http://www.vacantnewyork.com/ Pervasive vacancy is a malignancy, a cancer, and for lifelong NYC residents- prior to COVID- was a source of deep personal sorrow. The system was broken, and not in any way that supply/demand offered any wisdom to fix. As I suggested above, people who have the hammer of supply/demand often want to treat housing like a nail. It is not. There are lots of rich and intricate dynamics, and the language of supply/demand does not begin to be able to account for either the data, or the stories. Hope that's helpful. Cheers.

julianeon 6y ago

This is an interesting perspective, thanks for sharing. It makes sense but I would've never guessed this on my own.

Consultant32452 6y ago

Someone wanting to purchase and hold NYC real estate is still demand that would have to be outpaced in order to reduce prices. If you could somehow wave your magic wand and over night there could be 100x as many total units in NYC, do you believe prices would hold steady? Of course magic isn't real, it's just about questioning whether, in principle, there is some threshold past which the price would drop. If so, the model holds.

jonahbenton 6y ago
Sure- in the framing of- all models are wrong, some are useful- that sort of model may even be right, but it would fail to be useful. Fair? I don't disagree in principle with supply and demand, my point was rather that as a model it explains very little about New York City real estate, and if one insists on it as an explanatory tool, one will have to throw out nearly all of the data, which what makes it interesting to study. Various accounting fictions drive a lot of asset pricing. Not fictions in the sense of being false, but rather in the sense of being complicated narratives woven for various purposes that, at the end of the day, are just made up. Real estate is absolutely FULL of these, and they tell a much richer pricing story. Taking the hypothesis of 100x increase in supply- if we are able to poke at that magical occurrence, put it into context, provide some facts and reasoning behind it- we can see circumstances under which it either lowers or raises prices. I mostly see ways in which it raises prices. If the increase in supply was executed by adding to the inventory of one of the monster private owners in NYC- you can be damn sure there would be no sudden drop in pricing of the rest of their inventory, and dollars will go into tuning the machine- tax and reporting rules, interesting ways of structuring new inventory into new assets- so as to allow them to reallocate their ownership in ways that they deemed most advantageous. If the supply increase were executed by magically growing the inventory of city-owned property- you would also probably not see much in the way of price decrease. Why? The city will have the additional burden of maintenance for an enormous new footprint, for water, sewer, public transportation, etc. Huge capital investment would be required, which would require more population, and some sales. But the city will not make that inventory available in any way that would impact prices for other owners. Fund it with debt, keep prices steady, set up special programs to grant the properties, locked in to prevent fast turnover, to new owners who have to move to the city, and look forward to growing flows in the economy in the future. A way in which it might lower prices is if magically ownership of these new properties was distributed among existing renters or small property owners. This is closest to the behavior of an actual market, which describes NYC less and less as more and more of the footprint is held by large interests. But individuals would be forced with a choice of- leave their current space, or shed this new space, both of which would lead to various price depressions. But in the scheme of things, I see this as least likely. Even genies are lazy, and would prefer one large transaction to millions of small ones. Cheers.

jjeaff 6y ago

You describe a supply demand explanation of property as facile. But none of the reasons you give explain why keeping a property vacant is of no consequence to owners. A business deduction due to losses will only reduce your losses by your tax rate. Mortgages on those properties must still be paid. Then of course there is opportunity cost. Vacancy is tolerated to an extent by landlords in hopes of getting a higher rent and also a better renter. Especially in places like NYC where eviction can be costly and time consuming. Most of these extra factors are due to government regulations that are in affect manipulation supply and demand economics. I seriously doubt there are widespread cases of vacant properties actually being desirable or even tolerable for very long in places like NYC.

jonahbenton 6y ago
Thank you- With respect, "government regulations" doesn't begin to capture the dynamics, and IMO is not the right way to understand the ecology. An assumption underlying supply/demand from an economic and game theory sense is win/win- producers want to produce, consumers want to consume. Supply/demand- or really any- mechanism design breaks down when there are vast discrepancies in "power" between the actors, when some actors can change the levers on the mechanism, when actors have substantial incentives for sabotage, when the interests of the actors are simply in opposition. In real estate, owners and dwellers are, to a much greater degree, entities in opposition to one another, and only to a small degree, united in a common interest. Just one example- much of NYC's population is elderly, on a fixed/unindexed income. They simply cannot participate in a dynamically priced housing regime. There is an extensive history of owners preying on this population. If one reads stories of old New York, one sees that the vignette in The Godfather II where the young Vito Corleone strongarms an owner into keeping on an elderly tenant was extremely well chosen. Similarly, on a farm, children used to be a highly economic investment. In a city, children have become about the most uneconomic investment a family can make, to a degree because of de facto cartel behavior on the part of owners, where pricing per sq foot differs substantially by bedroom count. The presence of elderly and children must be optimized for for a city to exist at all, as the income producing working adults have both in their vicinity. From a pricing perspective it used to be that rent control and rent stabilization kept prices low for certain segments of the population. Stable/low prices are, to put it mildly, not a desirable opportunity for owners. This game was remachined with things like section 8 housing vouchers. Rather than prices being stable, they can "float" with the "market" (I use the term "market" loosely as there are a rich spectrum of techniques to shift what is considered market pricing). Tenants who pass through a gate are limited in what they have to pay to 30% of their income. The gap between 30% of income and "market price" is paid to owners by the federal government. And so on. Much more could be- and has been, of course, by people much better suited than me- on evictions, or money laundering, or any number of other subplots. Real estate is a balancing act, by governments, between the needs of what amount to predator/prey populations. In regards to the latter point- doubts about widespread cases of vacant properties being tolerable/desirable- forgive me, you evidently have not been here. Just one point in time snapshot for one segment of the city: http://www.vacantnewyork.com/ http://www.vacantnewyork.com/ Pervasive vacancy is a malignancy, a cancer, and for lifelong NYC residents- prior to COVID- was a source of deep personal sorrow. The system was broken, and not in any way that supply/demand offered any wisdom to fix. As I suggested above, people who have the hammer of supply/demand often want to treat housing like a nail. It is not. There are lots of rich and intricate dynamics, and the language of supply/demand does not begin to be able to account for either the data, or the stories. Hope that's helpful. Cheers.