Does a Builders’ Cartel Explain Rising Rents?

To a person with an antitrust hammer, every thing appears to be like like a monopoly nail. In a current Substack, antimonopoly campaigner Matt Stoller blames the rise in rents and anemic housing provide progress since 2007 on rising focus within the home-building trade, somewhat than native land-use rules, a proof he attributes to “noisy” YIMBYs. Is he proper?

Let’s begin with what he’s proper about. Various markets have seen rising focus within the home-building trade since 2007. However this pattern is a results of aware authorities coverage within the wake of the monetary disaster to manage mortgage lending extra tightly, as Kevin Erdmann on the Mercatus Middle has ably documented. These insurance policies drove many builders out of enterprise. Erdmann’s work, which is totally per the work accomplished within the Nineteen Nineties and early 2000s by Ed Glaeser at Harvard, Raven Saks Molloy on the Fed, Joseph Gyourko at Penn, and Invoice Fischel at Dartmouth, amongst many others, reveals that the housing scarcity predates 2007, at the least in lots of markets. Certainly, tight zoning guidelines have been fingered as a explanation for pricey, scarce housing since at the least 1972.

The rise in builder focus is a newer phenomenon, which isn’t excellent news for the thesis that builder focus has pushed progress in rents. However Stoller has one different piece of proof: builders’ use of “land banks” to accumulate tons and maintain them for later growth. He calls this proof of cartel habits:

Apparently, I believe there’s a cartelization impact happening as nicely. Right here’s Toll Brothers CEO Doug Yearley just a few years in the past:

‘We’re doing considerably extra third-party land banking the place we assign a contract to an expert land banker, who then feeds us land again on an as-needed foundation,” Yearley mentioned. “After which, we’re doing joint ventures with both Wall Avenue non-public fairness or with our buddies within the house constructing trade, the opposite builders.’ (emphasis unique)

What precisely does that quote imply? I don’t know, but it surely appears form of loopy that enormous homebuilders can be doing joint ventures with one another on land acquisition, when that might very simply result in holding provide off the market and stopping smaller builders from competing to construct cheaper houses.

However neither “land banking” nor joint ventures are proof of cartel habits (deliberately withholding tons from growth to be able to drive up new housing costs and income). Land growth is an extremely dangerous enterprise. You must attempt to gauge what market situations shall be in a few years as soon as your allow approvals have come via and the brand new models are move-in prepared, however in the meantime you’re taking up giant money owed that it’s important to begin paying again instantly. It is smart to not develop each plot of land you personal immediately, when you observe the vicissitudes of the real-estate market and, if crucial, trip out a nasty patch. For a similar motive, it might make sense to unfold threat throughout a number of monetary companions who all share a long-term view.

Stoller cites a working paper by Johns Hopkins College economist Luis Quintero as proof that market focus in home-building is driving up housing prices. It’s a severe paper, but it surely additionally has some methodological limitations, which can clarify why it has apparently kicked round for seven years with out but passing peer assessment. (It focuses on only a few East Coast markets, it defines housing markets in an unusually slender method, and the instrument appears to be legitimate solely beneath the situation that it principally simply captures time traits, not cross-section variation, however then there could possibly be many omitted components that share an identical time pattern.) Quintero might be proper that home-builder focus does cut back housing provide and lift prices, but it surely hasn’t been confirmed but, and it’s at finest a minor issue in comparison with the zoning restrictions YIMBYs speak about.

As a strategy to visualize the controversy, I regarded on the supply Stoller makes use of for builder focus information (the share of the market managed by the highest 10). Then for every of those markets, I plotted the connection with the latest housing prices measure (“regional worth parities”) produced by the Bureau of Financial Evaluation. The result’s beneath.

The connection between builder focus and housing prices in these 50 markets is zero, fully flat. Now, possibly you’ll be able to assemble a flowery causal mannequin in which you’ll tease out some small optimistic impact when you management for X, Y, and Z or web out some form of reverse causation, however this plot ought to give us a powerful suspicion that builder focus can’t be greater than a distant secondary or tertiary rationalization for why some markets are extra pricey than others.

For example, the Cincinnati metro space is likely one of the most extremely concentrated markets (97.2 p.c market share for the highest 10 builders!), however one of many most cost-effective locations for housing (83.7 p.c of the nationwide common!). Seattle shouldn’t be concentrated in any respect (59.4 p.c high 10 share), however is kind of costly (154.8 p.c of the US common).

Now what occurs once we plot housing prices in 2022 towards probably the most generally used measure of native residential land-use regulation? You get this:

Now that’s a powerful correlation! You possibly can quibble with the causal story right here: possibly high-demand markets are inclined to see housing prices rise and in addition attempt to undertake extra regulation, however even these different tales nonetheless find yourself affirming an impact of regulation on housing prices. Excessive-demand areas regulate provide to guard values for incumbent householders.

Not each drawback within the American economic system is about lack of competitors, and never each coverage “resolution” geared toward this non-problem will make issues higher. Stoller’s proposal to equalize credit score prices between massive and small builders will most likely simply trigger everybody’s credit score prices to go up. Large builders are higher dangers, so financiers will cut back lending if compelled to lend on the identical charges to massive and small builders. Extra pricey financing means… much less constructing and extra pricey housing. As a substitute, let’s take heed to the YIMBYs and legalize constructing in high-demand areas.