The Real Problem with Real Estate Understood by Market Monetarists

 This article was first published by me on Talkmarkets:

The real problem with real estate as understood by Market Monetarists requires understanding the concept of closed access versus open access cities. No, I am not talking about cities with restricted travel because there is a military base on the city, as we see in the old Soviet Union or even in modern Russia. For purposes of real estate, closed access cities are those that produce high quality products through having a highly trained workforce.

Salaries are high in closed access cities. It is difficult to move to a closed access cities as even rents are very high. Some tech people have actually lived in the Google parking lot because of cost. The Tiny House movement seeks an escape from closed access cities or at least an escape from their high living costs. Multigenerational households have increased in closed access cities

And poor people try to get away from closed access cities, as we see in this discussion by MM Kevin Erdmann, who has done lots of research on the issue.

The Market like Erdmann, Sumner and Benjamin Cole want more building in closed access cities. I could almost buy into that if the governments would improve the roads, but really, what could be done with the 405 in Los Angeles? You think traffic is bad now. Wait till they build massive projects in SF, or in Santa Monica! And you have the problem of building high rises in earthquake prone closed cities up and down the west coast.

But if access to these cities is closed, upward mobility becomes an issue.  As Erdmann says in the article cited above, there are pockets of abject poverty interspersed within the gentrified whole in the closed cities. 

Skid Row Los Angeles (Wikipedia)

We had seen riots in those cities in the past. We have noted that those cities have serious issues of rich and poor more than other cities. At least in open access cities, people could have a chance of finding a job and afford to get to it. Even transportation costs in closed access cities are a barrier to work for the poor that live there.

Erdmann says more of the closed access poor try to escape, moving to red states, where poverty is not addressed, but at least poverty is more affordable!

In the article cited above by Erdmann, he makes an astonishing statement, and a sobering one when trying to grasp the enormity of the problem. He says:

But, the worst repercussions are for those pockets of the most poor, dysfunctional neighborhoods in the closed access cities.  If I look at a map of New York City, or Los Angeles, or Washington, DC, one of the things I find striking is how in these cities where housing is so expensive and the demand to get access is so high, there will be pockets of very low value real estate and very poor neighborhoods.  Why, for instance, didn't the Bronx gentrify decades ago?  And, the sad reason is that the only possible way to live affordably in those cities is to live in a neighborhood that is so crime ridden and rotten that any reasonable outsider with any other options would be too frightened to live there.  Think about the implications of that, and the horrors that many low income urban people live through because of this whole complicated state of affairs.

[As an aside, I wonder sometimes when Donald Trump talks about cleaning up ghettos in the cities, mostly ghettos in closed access cities, if he is talking about development that would push the poor out. That does not solve the problem but just makes the lives of the poor more difficult.]

As to housing costs, it appears for now that costs in closed access cities are going to continue to remain high. So, even in an economic downturn, they suffer less price decline than open access cities. We saw that in the Great Recession, where coastal cities Perhaps this is a reason why builders want to build in closed access cities but can't, and builders are skittish about building in open access cities, because prices can decline or people may decide simply not to buy.

Baby boomers retiring could offer a boost to selected open access cities like Las Vegas and Atlanta, but here are a few boomer retirement towns that are smaller. The issue for boomers is the same as for the poor, and being able to live a quality life in retirement may not permit one to stay in a closed access city.

One cannot ignore the growing economic divide from region to region that speaks to open and closed access.  As the author says, in 1980, income reached its most widespread convergence across the geographical landscape of the nation , but that this is no longer the case. While the growth of the service sector led to this common equalization of income, the tech and financial revolutions that grew those businesses have given rise to the closed access city and the gap between different areas of the country as to prosperity.

The merger of big finance and big tech continues to this day, making closed access cities even less affordable, and the business of this merger shows up in massive litigation by Google and Apple, and through new payment systems being developed, with threats to create a cashless society and through the attempt to create driverless cars, etc. The innovation leaders are located in the closed access cities. Rents have skyrocket in the closed access cities due to lack of affordable alternatives.

America became great because the entire geography of the nation showed a growing prosperity. If that was the American dream it is less evident today. But we now have the optimists saying that the cost of living in Los Angeles is high, but the sunshine and avocados are worth it.

The author of that viewpoint paints a dreadful picture of the cost of living in LA, so don't be fooled. Closed access cities are closed for a reason. Price shuts them down to outsiders. The Market Monetarists quantify what many of us know from personal experience.

So, closed access is the central problem facing housing creation and affordability in America going forward. 

When I talk to guys at the Infiniti dealership in Las Vegas, more than a few have said they would love to live in LA or San Diego, but they just cannot justify doing so because of the cost of living. Yet they do appear to prosper in an open access city, holding jobs that pay well as long as they stay in open access cities.

As long as building is allowed in the open cities, it is up to the leaders there to make sure builders want to continue to build, allowing people to continue to escape from high priced areas. Remote employment often makes moving a lot easier.

But as boomers and millennials show little interest in buying and selling of houses (it has been said that 2/3rds of millennials don't even have a credit card), what will the landscape look like as time goes on?


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