Rich cities prosper while poor cities languish

High wage growth and nimby behavior that unduly restricts housing supply is a combination that inflates house prices in major cities.

For whoever has will be given more, but whoever does not have, even what he has will be taken away from him.

Jesus Christ — Mark 4:25

specialThe rich get richer and the poor get poorer. Karl Marx considered this trend inevitable, and he even named it the Law of Increasing Poverty. The unbridled capitalism of the 19th century led to extreme concentrations of wealth as powerful individuals ruthlessly created monopolies to crush their opponents while delivering low-quality products at very high prices.

On a more basic level, the rich get richer because they don’t consume everything they produce. Their savings accumulates while the poor often over-consume, accumulate debt, and make themselves poorer. The inequity of wealth starts at a personal level. However, these natural tendencies can either be exacerbated or mitigated by the government.

It is true democratic feeling, that all the measures of the government are directed to the purpose of making the rich richer and the poor poorer.

William Henry Harrison, the ninth President of the U.S.

The political right would agree with former President Harrison’s remarks. The political left, not so much.

when the laws undertake… to make the rich richer and the potent more powerful, the humble members of society… have a right to complain of the injustice to their Government.

Andrew Jackson, the seventh President of the U.S.

The populist undercurrent that vaulted Donald Trump to the Republican nomination suggests the perhaps the political elites working to concentrate wealth have gone too far.

The hypocrisy of Coastal California Progressives

California will side with the Democratic candidate for president no matter who wins the nomination. This year it’s Hillary Clinton, but the democrats could nominate Rod Blagojevich, and he would still take California. San Francisco in particular is unabashedly Progressive and as farther to the left than any other large city in the US.

Ordinarily, the political left embraces policies designed to redistribute wealth away from the very rich ostensibly to improve the quality of live of those less fortunate. The Left supports inheritance taxes, progressive income taxation, and other policies designed to reduce concentration of wealth.

By and large, San Francisco Progressives support these policies, but there is one glaring exception: housing.


Housing policies in California at large, and in San Francisco in particular, devastate the middle class, and serve to push the lower income classes out of the state. California has a chronic shortage of housing. It’s a problem caused primarily by nimbys who oppose any new development or construction.

The problem is worst in the San Francisco Bay Area where nimbys defeat most proposals for new housing. The Progressives there soothe themselves by passing affordable housing requirements in order to feel like they are addressing a problem. In reality they merely reallocate a scarce resource. Their policies exclude one group of hard-working potential homeowners in favor of another group that is less industrious.


While pursuing their nimby policies of restricting housing supply, Coastal California Progressives that own homes drive up home values and get rich. Very rich.

Rich City, Poor City: How Housing Supply Drives Regional Economic Inequality

By Ralph McLaughlin | August 31, 2016

Home values in the most expensive U.S. metros are diverging sharply higher from the rest of the country, fueled by strong income growth and scarce housing.
The U.S. housing market is growing more unequal. Over the past 30 years, prices in the 20 most expensive markets have risen much faster than prices in the 20 least expensive. What’s more, expensive markets almost always had bigger price gains compared to cheaper markets. In other words, the housing rich are getting richer while the housing poor are getting poorer.

As many of you know, I grew up in a small town in Central Wisconsin. When I was a pre-teen, we lived at 180 South Linden Street in Adams, Wisconsin. My parents sold this tiny house in 1977 for about $27,000. It sold again in May of 2015 for $38,000. In 38 years, this house appreciated a whopping $11,000. Nobody in rural American is making a fortune owning real estate.


Both trends suggest that economic convergence – the idea that over time, less expensive markets should “catch up” to more expensive ones – is not taking place. In fact, the most expensive housing markets in the U.S. are actually diverging from the rest of the pack, and as a result, long-time homeowners in the most expensive markets have had a much better return on their investment than homeowners in the least expensive.

Dr. Housing Bubble recently profiled a property at 2682 Parker Ave, Oakland, CA 94605. This property sold in December of 2011 for $80,000. Today it’s on the market for $400,000. To state the obvious, that property appreciated more rapidly than my childhood home in Wisconsin.

And much of the difference between high growth and low growth metros can be explained by two factors: income growth, and new housing supply.

We find that during the past 30 years:

  • The pack of most expensive markets is diverging from the rest. The priciest metros were 144% more expensive than the least expensive metros in 1986 but that differential has grown to over 319%.
  • Several markets we consider modern boom towns – such as San Francisco and San Jose – were also among the priciest 30 years ago, while others like Portland, Ore., Seattle, and Denver are the newcomers to the most expensive list.
  • There is wide regional variation in the amount of wealth generated from homeownership. Homeowners’ return on investment in Rochester, N.Y., and Wichita, Kans., have been +85% and +89.9%, respectively, while the return in San Francisco and San Jose has been +557.6% and +496.5%. This represents a cash return of approximately $50,000 in Dayton, Ohio, – the lowest cash return of the 100 largest metros – to nearly $900,000 in San Francisco.
  • The 30-year change in home value across the largest 100 metros is strongly correlated with income growth and new housing construction, while population and employment growth aren’t.


The market for housing in most of the United States is much more stable, and house prices are much less inflated because the local political system does not restrict new home development near as much as it does in California. Affordable housing in California requires ignoring the NIMBYs.

The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians. In California no State or regional entity has the power to mandate that any local political body must provide sufficient housing to meet local demand. Further, since local governments are highly dependent upon commercial and business tax revenue, they are always keen to zone for more commercial than residential land uses, which in turn creates imbalances between the number of jobs and the number of available housing units.

The only way California will ever have housing that’s affordable in a free-market, non-subsidized way is to shift some power away from local governing bodies — a course of action that will not be popular on the local level.walk_away This could take the form of direct approval override of local governments by a State or regional decision-making body, or it could take the form of mandates for development. In whatever form, some State or regional body must be given power to stop NIMBYs from lobbying local government officials to stop development that benefits everyone.

So why should we care? These community groups who oppose development win two ways: first, they maintain the status quo in their neighborhoods, and second, they inflate the value of their own real estate by choking off the supply. Once set in motion, this kind of opposition spirals out of control.

When supplies are limited, as they are now due to the presence of so many underwater borrowers stuck in the purgatory of cloud inventory, the substitution effect forces buyers at every price level to buy a lower quality house than they otherwise would. At the very bottom of the housing ladder, those buyers who can only afford the least expensive properties get priced out by higher wage earners substituting downward.

In short, California housing policies devastate the lower middle class. And that’s something Progressives are supposed to care about.

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