8 ms·

"I am skeptical. Yes a lot of Bay Area companies are allowing work from home for now, but are people really weighing that so heavily that they’re moving?" It i

by rsync 6y ago

"I am skeptical. Yes a lot of Bay Area companies are allowing work from home for now, but are people really weighing that so heavily that they’re moving?" It is the marginal buyer, not the entire population, that swings the price. It's the last few properties for sale that swing the price. Someone downthread explained it very nicely: "Rent is like a traffic jam. The market collapses on the margin. You don't need to remove 30% of the cars to reduce freeway congestion by 30%, and you don't need to remove 30% of the residents to lower asking rents by 30%, either."

etrautmann 6y ago
yep - rent is the quintessential example of inelastic supply. A tiny shortage of housing can cause a huge jump in price.
- sitkack 6y ago
  Sounds like for things that are inelastic, we should find ways (on both sides) to maintain a buffer if we want to have stable systems.
  - komali2 6y ago
    Both sides?
    - cameronbrown 6y ago
      Supply and demand, I'm guessing.
  - leetcrew 6y ago
    how would this work? the only way I can think of is for the government to buy above market when prices are going down and then unload them when prices go up. it's hard to see how the public would actually benefit from this. it's a little insane to use government funds to take perfectly good housing stock off the market and prevent people from living in it. seems like the cure would be worse than the disease. imo, it's best for cities not to try to influence the price of housing in the first place. but if you really want to bring down prices in a tight market, the best solution is to make it easier to build new (and especially denser) stuff. many cities could achieve this "simply" by relaxing zoning restrictions, but if necessary, they could go so far as to subsidize high-density developments. in the much more rare case that prices are collapsing, a city could be more aggressive in condemning dangerous structures.
    - jdmichal 6y ago
      And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing. Dropping property prices shouldn't even be an issue for owners. Property value and thereby property taxes should also go down. As long as they can cover that, then they can continue to own the property. Except in reality everyone is actually leveraged against their property and don't own outright. In which case, sounds like their leveraged risk failed and losing the property is supposed to be the outcome of that. And the new buyer can get it at a cheaper and more maintainable price. I want to be clear that I'm discussing business owners of commercial property -- including residential rentals. Obviously the above is less desirable when we're talking about real people becoming homeless. But no one is going homeless if a business loses a leveraged property to another buyer.
      - leetcrew 6y ago
        > And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing. I'm sure there are some subtleties I'm missing, but this has always struck me as a little odd. why do we subsidize agricultural production and then turn around and also pay farmers not to use fields to stop the price from falling too low? also a price collapse isn't necessarily cataclysmic for someone with a mortgage. as long as they can keep making the monthly payments, nothing immediately changes. it's only a problem if you need to sell or if the prices never recover.
        Retric 6y ago
        It’s mostly about buying votes cheaply. There are significant incentives to consistently maintain a food surplus, but one you start handing out government subsidies you get the usual corruption. As subsides crash prices it’s cheaper to just pay farmers to do nothing than to pay them to create a crop that’s just going to rot. Basically, you don’t want to pay 1$ to farmers per ton of corn just to lower the price of a ton of corn by 1$. The goal is to hand that dollar to the farmers not the general public.
        grawprog 6y ago
  - mdgrech23 6y ago
    Inelastic just means consumers aren't sensitive to price. The classical example is prescription drugs. Consumers are not price sensitive b/c they NEED those drugs. As such the seller can raise price and not see a drop off in sales. I think a good example of a highly elastic good is hamburgers. Is McDonalds raises burger prices by 300% there a ton of other options for consumers to switch to and sales will drop.
    - vikramkr 6y ago
      A better example is brand name prescription drugs. State substitution laws end up meaning that when generics come on market, a lot of consumers become proce sensitive by law since the pharmacy must fill the prescription with the lower priced generic. However, anyone who is still buying the brand name at that point is highly inelastic - they really want the brand name only for whatever reason. Thats why the brand name version of a drug usually spikes up in price when a generic enters the market - theres no way to compete with the generic folks on price so at least get as much out of your smaller remaining market segment that you can by using their price inelasticity
      - AnthonyMouse 6y ago
        In particular it's not only brand name medications, but patented ones, because then there is by law only one supplier, and the temporarily high price is on purpose as a reward for developing the new drug. The problem we have then is that it's getting paid for by insurance, and we don't have a good mechanism to distinguish between essential things and merely new things. If somebody comes up with the cure for cancer, letting them soak the insurance companies for 20 years is a fair trade. If somebody comes up with a pill that does the same thing as the combination of two pills that had been standard practice previously, but can convince doctors to prescribe the new thing, letting them soak the insurance companies for 20 years is some kind of regulatory failure.
        vikramkr 6y ago
        Well actually, the only patent prescription drug is a bit elastic since insurance/PBMs negotiate on price. In referring to the particular case of a formerly on patent brand name drug that goes off patent that spikes in price. You'll notice that even over the counter non patented brand name drugs are more expensive than the generics - brand loyalty breeds inelasticity
  - mywittyname 6y ago
    This is what leases are for, they fix prices for a year or so by adding cost friction to moving (usually a few months of rent). Which, in theory, act as a buffer to stabilize prices. The problem is that the cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay. We saw the reverse of this before: when landlords were paying people $8,000 to move early because rent inflation meant they could charge much more than that to the next tenant. SF is an outlier because of the income disparity, relatively low housing density, and unique climate & economic opportunity available there.
    - whimsicalism 6y ago
      > cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay What's the law on this? I've read that the landlord is required to make a good faith effort to replace you, but if they can't (or if they can't recoup the costs), you are on the hook. So if the cost is 32% lower and the landlord can only find a tenant willing to pay that much, it seems like you are responsible for the 32% for the remaining months of the lease - which is no better than if you just hadn't moved. And that's not even including the fact that the place might be on the market for months.
      - leetcrew 6y ago
        there are ways to break a lease without penalty; I'd guess the qualifying circumstances vary state to state. also, some leases have explicit buyout clauses. I can get out of my current lease free and clear at any time by giving sixty days notice and paying an additional ~$2000 (a bit more than one month's rent). so if rents collapsed soon after renewing my lease, I could break even pretty easily by moving out.
        whimsicalism 6y ago
        Okay - I was talking specifically about California. Most leases in SF do not have buyout clauses of this form I believe.
      - 6y ago
- thaumasiotes 6y ago
  > rent is the quintessential example of inelastic supply. A tiny shortage of housing can cause a huge jump in price. You'd need inelastic demand for this, not inelastic supply.
  - foota 6y ago
    It seems to me like both are required. Supply is more elastic, but only in the medium term.
    - thaumasiotes 6y ago
      > It seems to me like both are required. That's a fair point. With inelastic demand and elastic supply, you'd expect to see expanding supply, not skyrocketing prices. But if we're defining the circumstances to be a "shortage", are we defining away the possibility of expanding supply?
      - foota 6y ago
        There can be a short term shortage, which doesn't mean supply never arrives, just that it'll take a bit.
  - asdffdsa 6y ago
    Demand used to be inelastic; the new normal (remote work) removes this
- fulafel 6y ago
  Elasticity features depend on the specific housing market but in the basic mental model housing supply can contract in the medium term when demand contracts and vice versa. Demand is also elastic at least in the sense that people get bigger houses / move on to their own earlier / get roommates depending on the situation. And geographically people spread out further if prices get high or move in from neighbouring locales which can be seen as demand elasticity if looked at from pov of a local housing market.
  - colinmhayes 6y ago
    Housing supply is 100% inelastic in the 6 month time frame. In the medium run it's pretty inelastic in the bay because of NIMBY backed zoning laws not allowing for densification.
  - fulafel 6y ago
    BTW the price elasticity of supply equation is always discussed as how the price affects supply. Anyone know how economists think about changes in supply affecting the price, is the same equation used? Eg destruction or creation of housing units.
user5994461 6y ago
You should consider that the market really removed 30% of the residents. When 30% of people don't know whether they will be able to find/keep a job to pay the expensive rent, they simply refused to pay the current rent or found themselves unable to. Rent went down. For me and most people I know when the landlord came asking about renewal (London is all about yearly contracts) for a similar price or more, he was told to f* off. When everybody is doing that, rent is going down. In a sense the perception of the market is driving the market. The virus is affecting 90% of the population, it's not just hitting the margin. I say landlord but it's very often a letting agency (taking commission for finding tenants), the landlord is someone abroad or an investment company that's nowhere to be seen. They don't have each other interest at heart.

by rsync 6y ago

etrautmann 6y ago

yep - rent is the quintessential example of inelastic supply. A tiny shortage of housing can cause a huge jump in price.

sitkack 6y ago
Sounds like for things that are inelastic, we should find ways (on both sides) to maintain a buffer if we want to have stable systems.
- komali2 6y ago
  Both sides?
  - cameronbrown 6y ago
    Supply and demand, I'm guessing.
- leetcrew 6y ago
  how would this work? the only way I can think of is for the government to buy above market when prices are going down and then unload them when prices go up. it's hard to see how the public would actually benefit from this. it's a little insane to use government funds to take perfectly good housing stock off the market and prevent people from living in it. seems like the cure would be worse than the disease. imo, it's best for cities not to try to influence the price of housing in the first place. but if you really want to bring down prices in a tight market, the best solution is to make it easier to build new (and especially denser) stuff. many cities could achieve this "simply" by relaxing zoning restrictions, but if necessary, they could go so far as to subsidize high-density developments. in the much more rare case that prices are collapsing, a city could be more aggressive in condemning dangerous structures.
  - jdmichal 6y ago
    And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing. Dropping property prices shouldn't even be an issue for owners. Property value and thereby property taxes should also go down. As long as they can cover that, then they can continue to own the property. Except in reality everyone is actually leveraged against their property and don't own outright. In which case, sounds like their leveraged risk failed and losing the property is supposed to be the outcome of that. And the new buyer can get it at a cheaper and more maintainable price. I want to be clear that I'm discussing business owners of commercial property -- including residential rentals. Obviously the above is less desirable when we're talking about real people becoming homeless. But no one is going homeless if a business loses a leveraged property to another buyer.
    - leetcrew 6y ago
      > And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing. I'm sure there are some subtleties I'm missing, but this has always struck me as a little odd. why do we subsidize agricultural production and then turn around and also pay farmers not to use fields to stop the price from falling too low? also a price collapse isn't necessarily cataclysmic for someone with a mortgage. as long as they can keep making the monthly payments, nothing immediately changes. it's only a problem if you need to sell or if the prices never recover.
      - Retric 6y ago
        It’s mostly about buying votes cheaply. There are significant incentives to consistently maintain a food surplus, but one you start handing out government subsidies you get the usual corruption. As subsides crash prices it’s cheaper to just pay farmers to do nothing than to pay them to create a crop that’s just going to rot. Basically, you don’t want to pay 1$ to farmers per ton of corn just to lower the price of a ton of corn by 1$. The goal is to hand that dollar to the farmers not the general public.
      - grawprog 6y ago
- mdgrech23 6y ago
  Inelastic just means consumers aren't sensitive to price. The classical example is prescription drugs. Consumers are not price sensitive b/c they NEED those drugs. As such the seller can raise price and not see a drop off in sales. I think a good example of a highly elastic good is hamburgers. Is McDonalds raises burger prices by 300% there a ton of other options for consumers to switch to and sales will drop.
  - vikramkr 6y ago
    A better example is brand name prescription drugs. State substitution laws end up meaning that when generics come on market, a lot of consumers become proce sensitive by law since the pharmacy must fill the prescription with the lower priced generic. However, anyone who is still buying the brand name at that point is highly inelastic - they really want the brand name only for whatever reason. Thats why the brand name version of a drug usually spikes up in price when a generic enters the market - theres no way to compete with the generic folks on price so at least get as much out of your smaller remaining market segment that you can by using their price inelasticity
    - AnthonyMouse 6y ago
      In particular it's not only brand name medications, but patented ones, because then there is by law only one supplier, and the temporarily high price is on purpose as a reward for developing the new drug. The problem we have then is that it's getting paid for by insurance, and we don't have a good mechanism to distinguish between essential things and merely new things. If somebody comes up with the cure for cancer, letting them soak the insurance companies for 20 years is a fair trade. If somebody comes up with a pill that does the same thing as the combination of two pills that had been standard practice previously, but can convince doctors to prescribe the new thing, letting them soak the insurance companies for 20 years is some kind of regulatory failure.
      - vikramkr 6y ago
        Well actually, the only patent prescription drug is a bit elastic since insurance/PBMs negotiate on price. In referring to the particular case of a formerly on patent brand name drug that goes off patent that spikes in price. You'll notice that even over the counter non patented brand name drugs are more expensive than the generics - brand loyalty breeds inelasticity
- mywittyname 6y ago
  This is what leases are for, they fix prices for a year or so by adding cost friction to moving (usually a few months of rent). Which, in theory, act as a buffer to stabilize prices. The problem is that the cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay. We saw the reverse of this before: when landlords were paying people $8,000 to move early because rent inflation meant they could charge much more than that to the next tenant. SF is an outlier because of the income disparity, relatively low housing density, and unique climate & economic opportunity available there.
  - whimsicalism 6y ago
    > cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay What's the law on this? I've read that the landlord is required to make a good faith effort to replace you, but if they can't (or if they can't recoup the costs), you are on the hook. So if the cost is 32% lower and the landlord can only find a tenant willing to pay that much, it seems like you are responsible for the 32% for the remaining months of the lease - which is no better than if you just hadn't moved. And that's not even including the fact that the place might be on the market for months.
    - leetcrew 6y ago
      there are ways to break a lease without penalty; I'd guess the qualifying circumstances vary state to state. also, some leases have explicit buyout clauses. I can get out of my current lease free and clear at any time by giving sixty days notice and paying an additional ~$2000 (a bit more than one month's rent). so if rents collapsed soon after renewing my lease, I could break even pretty easily by moving out.
      - whimsicalism 6y ago
        Okay - I was talking specifically about California. Most leases in SF do not have buyout clauses of this form I believe.
    - 6y ago
thaumasiotes 6y ago
> rent is the quintessential example of inelastic supply. A tiny shortage of housing can cause a huge jump in price. You'd need inelastic demand for this, not inelastic supply.
- foota 6y ago
  It seems to me like both are required. Supply is more elastic, but only in the medium term.
  - thaumasiotes 6y ago
    > It seems to me like both are required. That's a fair point. With inelastic demand and elastic supply, you'd expect to see expanding supply, not skyrocketing prices. But if we're defining the circumstances to be a "shortage", are we defining away the possibility of expanding supply?
    - foota 6y ago
      There can be a short term shortage, which doesn't mean supply never arrives, just that it'll take a bit.
- asdffdsa 6y ago
  Demand used to be inelastic; the new normal (remote work) removes this
fulafel 6y ago
Elasticity features depend on the specific housing market but in the basic mental model housing supply can contract in the medium term when demand contracts and vice versa. Demand is also elastic at least in the sense that people get bigger houses / move on to their own earlier / get roommates depending on the situation. And geographically people spread out further if prices get high or move in from neighbouring locales which can be seen as demand elasticity if looked at from pov of a local housing market.
- colinmhayes 6y ago
  Housing supply is 100% inelastic in the 6 month time frame. In the medium run it's pretty inelastic in the bay because of NIMBY backed zoning laws not allowing for densification.
- fulafel 6y ago
  BTW the price elasticity of supply equation is always discussed as how the price affects supply. Anyone know how economists think about changes in supply affecting the price, is the same equation used? Eg destruction or creation of housing units.

user5994461 6y ago

You should consider that the market really removed 30% of the residents. When 30% of people don't know whether they will be able to find/keep a job to pay the expensive rent, they simply refused to pay the current rent or found themselves unable to. Rent went down. For me and most people I know when the landlord came asking about renewal (London is all about yearly contracts) for a similar price or more, he was told to f* off. When everybody is doing that, rent is going down. In a sense the perception of the market is driving the market. The virus is affecting 90% of the population, it's not just hitting the margin. I say landlord but it's very often a letting agency (taking commission for finding tenants), the landlord is someone abroad or an investment company that's nowhere to be seen. They don't have each other interest at heart.