Housing Markets and Public Policy 9781512816471

Table of contents :
Foreword
Acknowledgments
Contents
List of Tables
List of Charts
I. Introduction
II. The Market Structure
III. The Filtering Process
IV. Movements of Prices and Rents
V. New Construction
VI. Maintenance and Improvement of the Standing Stock
VII. Residential Renewal
Selected References
Index

Citation preview

Housing Markets and Public Policy

Publications in the City Planning Series Institute for Urban Studies University of Pennsylvania Robert B. Mitchell, Director

T H E PLACE OF T H E IDEAL C O M M U N I T Y IN CITY PLANNING

Thomas A. Reiner HOUSING MARKETS AND P U B L I C POLICY

William G. Grigsby EXPLORATIONS INTO URBAN S T R U C T U R E

M . M . Webber, J. W . Dyckman, D. L. Foley, A. Z. Guttenberg, W . L. C. Wheaton, G. B. Wurster STRUCTURING T H E J O U R N E Y TO WORK

Howard S. Lapin URBAN R E N E W A L IN EUROPEAN COUNTRIES:

Potentials Leo Grebler

Its Emergence and

Housing Markets and Public Policy by

William G. Grigsby The

Institute University

for of

Urban Studies Pennsylvania

University of Pennsylvania Press Philadelphia

© 1963 by the Trustees of the University of Pennsylvania

Published in Great Britain, India, and Pakistan by the Oxford University Press London, Bombay, and Karachi

Library of Congress Catalog Card Number: 63-15010

7400 Printed in the United States of America

Foreword

During the last decade most American cities have embarked upon programs of urban renewal and redevelopment. These had their origins in the decline of property values, industrial activity, and retail sales which seems to threaten the economic and social life of American cities. T h e program of aids authorized by the Federal Housing Act of 1949 and subsequent state legislation enabling urban renewal is testimony to this widely felt civic concern. As a consequence, renewal has become a nation-wide activity, attracting the attention and energies of city planners, civic and business leaders, research organizations, and municipal government. T o date this enormous expenditure of human energy and attention has produced a large number of projects which have served to make us aware of the potentialities in urban renewal and have given us a vision of the better cities our society might produce. However, the actual quantitative impact of urban renewal activities has aifected less than 5 per cent of all building and a scarcely measurable fraction of all areas developed. Indeed, it is apparent that the decisive force reshaping American cities has been the high volume of suburban building, directed largely by market forces and constrained by the most tenuous of planning controls, rather than direct renewal efforts. 5

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HOUSING MARKETS AND PUBLIC POLICY

As our understanding of both the possibilities and the limitations of urban renewal has expanded, it has become clear that the building of cities must take account of both suburban expansion and central renewal, both normal market processes and special interventions by government, both private endeavor and public endeavor. This is especially evident in housing, where urban renewal has too often produced only luxury apartments for a tiny market and where private enterprise has produced massive suburban developments for upper-middle income groups, but where the needs of the vast majority of lowermiddle and low-income families have been left to the exigencies of the used-house market and the filtration process. Most of the housing progress made in recent years has in fact resulted from private building on the outskirts, the progressive movement of families from central cities to suburbs, and the increasing availability of poorer quality stock at lower prices for low-income families. Direct public action, through incentives for the rehabilitation of older housing, through public subventions for private, so-called middle-income housing, and through public, low-rent housing, while revealing important potential tools for broader action, has been quantitatively limited to only a fraction of the potential market. This volume is one of the first major attempts to analyze the relationships between the private housing market and public renewal and other programs. In addition, it is one of the first attempts to introduce flow analysis into housing market studies on a more systematic basis and to tie this flow analysis to the applications of matrix analysis developed in recent years by Dr. Grigsby and Dr. Chester Rapkin at the University of Pennsylvania. For these reasons it is an important contribution to our

FOREWORD

7

understanding of the relationships between market processes and public aids and controls. It points u p sharply the conflicts in goals which may emerge within superficially consistent public policies, and underscores the necessity for thinking about the broader housing market of the metropolitan area as a prerequisite to the development of effective renewal policies. T h e analysis of flows in the market clearly reveals some of the reasons for the declines in new residential construction in recent years, the severe restraints which presently operate in the housing market, and the types of measures which must be devised, tested on an experimental basis, and finally adopted before we can open the housing market to effective participation by most potential buyers and renters. It reveals some of the public policies which are essential if public action is to sustain and enlarge the private market and if the private market is to succeed in expanding so that it meets a broader spectrum of American housing needs. This study was made possible through a grant to the Institute for Urban Studies by the Ford Foundation as a part of a series of grants dealing with urban renewal. Data were drawn in part from an earlier project on the Philadelphia housing market supported by the Philadelphia Redevelopment Authority and the Urban Renewal Administration, conducted by Drs. Rapkin and Grigsby. The study illustrates the fact that the home-building industry has been limping along with inadequate knowledge of the market processes which determine its role in our economy. It strongly suggests that substantial investments in research would pay off heavily, not only for the building industry but also for the government agencies at all levels which presently commit billions annually in federal

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aids of various sorts without systematic understanding of the consequences of these programs or of their role in shaping the future city. We are deeply indebted to Dr. Grigsby for this important demonstation. William L. C. Wheaton, Director

Acknowledgments

The persons and organizations that helped to make this study possible were few, but their contributions were considerable. Financial support came in part from a grant by the Ford Foundation and in part from the Institute for Urban Studies. Morton Baratz, Grace Milgram, Chester Rapkin, and William L. C. Wheaton together offered several hundred penetrating comments and criticisms which materially elevated the analytic content. In fact, the completion of this book would have been impossible without their guidance. Ruth Monheit provided typing and clerical assistance and much encouragement along the way. Research assistance during part of the project was furnished by Verne Winquist. Ibrahim Jammal prepared the charts and graphs. T o each of these contributors, the author wishes to express his sincere appreciation. William G. Grigsby

9

Contents I Introduction Prior Studies Organization of the Study

21 26 28

II T h e Market Structure 40 Housing Submarkets—Components of Supply 33 T h e Several Continuums 36 Shifting Linkages 37 Linkages among Dissimilar Groups of Dwelling Units 39 Approaches to Matrix Analysis 43 Housing Submarkets—Components of Demand 47 Family Characteristics Associated with Attributes of Supply 48 Linkages Based on Movements of Households 56 Types of Moves 61 Family Movement and the Rate of Market Change 75 Residential Mobility—the Joining of Supply and Demand 76 Summary 82 III The Filtering Process Definitions of Filtering Change in Price or Rent—Change in Occupancy Change in Position of Dwelling Unit on the Value Scale Change in Price or Rent (Constant Dollars) Improvement in Housing Conditions Summary The Mechanics of Filtering

84 85 86 87 91 95 98 99 11

12

TABLE O F CONTENTS

What Causes Filtering T h e Depreciation Curve for Housing Vacancies and Filtering The Termination of the Flow Some Hypothetical Cases Filtering in a Demographically Stable, Residentially Mobile Society The Effect of Changing Composition of the Population Income Levels and Competition between New and Existing Units The Effect of Population Growth The Impediment of Immobility The Effect of Income Cycles Summary IV Movements of Prices and Rents Sources and Limitations of the Data An Initial View of the 1950-1956 Experience Patterns of Price and Rent Movements—I Patterns of Price and Rent Movements—II Has the Housing Problem Grown Worse? Area Differences in Value and Rent Movements Growth Rates and Value and Rent Movements Construction Industry Performance and Value and Rent Movements Other Factors Affecting Value and Rent Movements Prospects for the Future

100 103 107 107 110 110 114 114 116 119 121 128 131 132 135 139 148 154 160 163 165 168 171

V New Construction 174 Dominance of the Existing Stock 178 Quantitative Dominance 180 Qualitative Equality 182 Market Barriers to a Larger Volume of Construction 185 Market Demand 187 Market Supply 190 Market Flows 192

TABLE O F CONTENTS

Nonmarket-oriented Families Market-oriented Families Semimarket-oriented Families Strategies for Home Builders Lower Prices Better Product Mix Improved Advertising and Selling Techniques The "Captive" Market for New Construction T h e Home Ownership Barrier T h e Question of Credit Summary VI Maintenance and Improvement of the Standing Stock Characteristics of Substandard Housing Determinants of Investment in Marginal and Declining Residential Areas T h e Area Approach to Renewal Some Closing Remarks VII Residential Renewal Size and Location of the Problem Area Variations Tenure Variations Racial Variations Progress without a Renewal Program An Illusion of Progress? Variations in Rate of Progress Progress Explained T h e Future Problem T h e Bottleneck in Renewal T h e Low Income—Substandard Housing Nexus T h e Illusion of Prohibitive Expense Barriers to a Solution Lack of a Satisfactory Formula Lack of Support Limited Capacity of the Building Industry

13

193 196 196 204 205 208 210 214 216 218 224 228 229 233 244 250 251 252 253 257 258 259 261 262 264 268 269 270 275 277 277 280 281

14

TABLE O F CONTENTS

Problem Families A General Strategy for Renewal Stimulation of Housing Expenditures Rising Real Incomes Increased Government Expenditures for the Housing of Special Groups Increasing Housing Expenditures by Users Increased Maintenance Expenditures by Investor-Owners Minimization of Writedown Other Elements of Renewal Strategy and Tactics New Criteria for Federal Assistance Some Conclusions

282 283 288 290 291 295 305 315 320 322 331

Selected References

336

Index

341

List of Tables

Table

Table

Table

Table

1 Proportion of Households in Philadelphia Standard Metropolitan Area Living in Center City Apartments by Family Type, Age of Head, Family Income, and Employment Location, 1957

49

2 Estimated Distribution of Home Buyers by Family Income and Employment Location of Head of Household, and by Value and Location of the Home that Was Purchased, Philadelphia Standard Metropolitan Area, 1955-56

51

3 Hypothetical Submarket Linkages among Single-Family Homes in the Market Supply, Philadelphia Standard Metropolitan Area, 1955-56

54

Previous Tenure by Value of Present Residence, Purchasers of Single-Family Homes, Philadelphia Standard Metropolitan Area, 1955-56

58

Matrix of Housing Submarkets, Based on Either Actual or Intended IntraMarket Moves of Households

60

Table

6 Net Actual or Potential Shifts of Households among Submarkets in Table 5

62

Table

7

Table

4

5

Movement of Households to, within, and from the Philadelphia Standard Metropolitan Area, by Tenure and by Type or Occasion of Move, 1955 and 1956

71 15

16

Table

Table

LIST O F TABLES

8 Movement of Households to, within, and from the City of Philadelphia, by Tenure and by Type or Occasion of Move, 1955 and 1956

72

9 Movement of Households, to, within, and from the Outlying Counties of the Philadelphia Standard Metropolitan Area, by Tenure and by Type or Occasion of Move, 1955 and 1956

73

Table 10 Relationship of "Quality" of Housing and Income Levels to the Average Economic Life of the Residential Inventory 117 Table 11 Contract Monthly Rent, for Same Nonfarm Units, United States, 1956 by 1950. 137 Table 12 Value of Owner-Occupied Property, for Same Nonfarm Units, United States, 1956 by 1950 138 Table 13 Estimated Incidence of Rent Increases and Reductions, Same Nonfarm Rental Units, United States, 1950-56 142 Table 14 Estimated Incidence of Appreciation and Depreciation, Same Nonfarm Owner-Occupied Units, United States, 1950-56 143 Table 15 Estimated Incidence of Rent Reductions among Nonfarm Rental Units, United States, 1950-56 152 Table 16 Estimated Incidence of Depreciation, Single-Family Nonfarm Owner-Occupied Units, United States, 1950-56 153 Table 17A The Relationship of Changes in Value and Contract Rent of Same Units to Household Growth, Volume of Home Building, and Gross and Net Additions to the Housing Inventory, Selected Standard Metropolitan Areas, 1950-56 161

LIST OF TABLES

17

Table 17B T h e Relationship of Changes in Value and Contract Rent of Same Units to Rate of Home Building, Value and Rent of New Units, Size and Rate of Growth of Market Area, and Tenure Composition of New Construction, Selected Standard Metropolitan Areas, 1950-56. 162 Table 18 Estimated Changes in Median Contract Monthly Rent, 1950-56, by 1950 Contract Rent Level, Same Units, Selected Standard Metropolitan Areas 169 Table 19 Increase and Reduction in Number of Occupied Substandard Dwelling Units by Cause of Change, United States, 1950-56. 176 Table 20 Changes in the Number of Occupied Substandard Dwelling Units Compared with Volume and Rate of New Residential Construction, Selected Standard Metropolitan Areas, 1950-56 177 Table 21 Occupied Dwelling Units Dilapidated or Lacking Facilities, by Type of Tenure, United States, 1950, 1956, and 1960 254 Table 22 Changes in the Number of Occupied Substandard Dwelling Units Inside and Outside Standard Metropolitan Areas, 195056 256 Table 23 Incidence of Substandard Occupied Dwelling Units by Area and Tenure, 1956 258 Table 24 Changes in Number of Standard and Substandard Occupied Units by Cause of Change, United States and Selected Areas, 1950-56 265

List of Charts Chart A

Chart B Chart C Chart D Chart E Chart F Chart G

Chart H Chart I Chart J Chart K Chart L

Chart M

18

Proportion of Movers and Nonmovers by Age of Head of Household, Households Moving to and within the Philadelphia Standard Metropolitan Area, 1955-56 Sources of Housing Demand, Philadelphia Standard Metropolitan Area, 1955-56 Sources of Housing Demand, City of Philadelphia, 1955-56 Sources of Housing Demand, Suburban Counties of Philadelphia Standard Metropolitan Area, 1955-56 Sources of Demand for New and Used Owner-Occupied Units, Philadelphia Standard Metropolitan Area, 1955-56 Sources of Demand for New and Used Owner-Occupied Units, City of Philadelphia, 1955-56 Sources of Demand for New and Used Owner-Occupied Units, Suburban Counties of Philadelphia Standard Metropolitan Area, 1955-56 Hypothetical Quality and Depreciation Curves Hypothetical Housing Depreciation Curve. Hypothetical Income and Household Cycle for Community of T e n Families Hypothetical Housing Market Showing Types of Demand and Types of Market Supply Type of Demand for and Market Supply of Single-Family Homes in a Hypothetical Situation of Potential Equilibrium Involving Semimarket-Oriented Families Relationship of Quality of Occupied Housing to Values and Rents in T w o Hypothetical Market Situations.

57 64 65 66 67 68

69 108 109 126 194

198 240

Housing Markets and Public Policy

I Introduction This is a study of the structure and operation of the housing market with special reference to the problems of maintaining adequate levels of new construction, improving housing standards, and renewing or eliminating decayed portions of the residential inventory. The study is concerned primarily with the use, reuse, and continual alteration and exchange of secondhand capital assets. It has often been observed that the current stock of dwelling units tends to dominate the housing market, and that the extent to which the shelter needs of the population are served is governed by the amount and adequacy of the existing supply. Because of the durability of the housing unit and its high value, a relatively small number are demolished each year and additions to supply constitute a similarly small proportion of the existing total. The supply itself, however, is by no means static. As the result of the passage of time, some dwelling units deteriorate physically and become obsolescent; others seem to improve with age. Values and rents shift usually, 21

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HOUSING MARKETS AND PUBLIC POLICY

but not invariably, to lower relative levels. Units become vacated and remain unused for varying periods of time. Some are abandoned, demolished, or converted to other uses. Small dwellings are enlarged. Larger units are subdivided into smaller units, sometimes with an appalling deterioration in quality and at other times with a sharp and discernible upgrading in character and value. Units shift from owner-occupancy to rental status. T h e characteristics of the occupants alter over time; a given unit may serve a family at different stages of its life cycle or different families in the same stage, but drawn from different social sectors of the population. ¡In short, there is a ferment of physical, economic, social, and legal movement that takes place within the housing stock as the inventory is continually adapted to the changing requirements of society. In no other sector of the economy is there a comparable phenomenon. These changes are quite obviously of great significance. T h e quality of the standing stock is contingent upon the rate of deterioration and demolition. T h e extent to which families are adequately supplied in the market is a function of variations in price which accompany physical or social obsolescence. T h e number, degree or intensity of occupancy, and price of existing dwelling units have a material influence on the volume of new construction that is created each year. T h e number and location of demolitions and abandonments have a strategic bearing on the areas of the city that can be reconstructed with or without public assistance. T h e factors that affect the supply of and demand for housing in general or for dwelling units at a particular location or in a specific price bracket have commanded the attention of a variety of groups. Judgments on what is likely to happen in the housing supply are made most

INTRODUCTION

23

frequently in the market place by equity investors in real estate, mortgage lenders, and prospective home purchasers, all engaged in the process of selecting properties with a minimum likelihood of value decline or maximum possibility of value appreciation. Witness, for example, the decisions of many bankers not to finance acquisitions in racially changing neighborhoods or in areas where homes are more than twenty or thirty years old. By investigation or intuition they have arrived at the view that the potential rate of decline in value of homes in such areas is greater than average. Actually, however, we know relatively little about the supply and demand forces behind price movements in various sectors of the housing stock. Changes in the value and occupancy of units in thel existing stock are most relevant, however, to the problems of housing need. Unlike almost all other consumer goods, virtually the entire stock of new dwelling units con-, structed each year comes into the supply at prices which are out of the reach of a large percentage of families.1 i T h e proportion of households that cannot afford a new home has been the subject of considerable dispute, and in fact has been termed a "metaphysical" question by one author. Much of the difference of opinion stems from lack of objective measures of income, asset position, family size, financing terms, prices of new construction and other goods and services which a family must purchase. Estimates of the proportion of families who cannot afford new homes has varied from as low as 20 per cent (Sherman J. Maisel, "Policy Problems in Expanding the Private Housing Market," American Economic Review, XLI [May, 1951] 599-611) to as high as two-thirds. O u r fragmentary data suggest that it is less than half. In the Philadelphia Standard Metropolitan Area, for example, figures from the National Housing Inventory indicate that in 1956 roughly 40 per cent of the homeowners and 85 per cent of the renters would have had to increase their housing expenditures if they had chosen to buy or rent a new home. These two groups combined comprised in all approximately 55 per cent (660,000) of all households in the area. Many families in this group, however, were spending a relatively low percentage of their income for housing and thus probably could easily have purchased a new home if they had wanted one.

24

HOUSING MARKETS AND PUBLIC

POLICY

Who are the groups that occupy dwelling units below the new construction rent or price levels? They include low-income families for whom new housing would absorb a major part if not all of their income; families who consider the increase in price to be more than the difference in quality between new and existing units; and families that prefer to spend their income on commodities other than housing. 2 Some purchased new homes years ago and continue to occupy them; others reside in units created by conversion; still others live in public housing. The bulk of these families, however, reside in quarters that were previously occupied by others and that may have once been of higher quality relative to other units in the housing stock. Thus, it is on the large stock of older existing houses that most of the families who are unwilling or unable to pay for a new home depend for their accommodations. The adequacy of these accommodations in turn depends upon the extent to which declines in the market value of the existing stock brings satisfactory units into lower rent and price brackets faster than physical deterioration renders the structures uninhabitable. There is no need for a grandiose statistical demonstration to support the proposition that the decline in the initial price level of housing has not been sufficient to 2 There is a small group of low-income families that occupies standard housing at an expense seemingly beyond any reasonable ratio to their current income. This group tends to finance acquisitions or rentals out of accrued savings, gifts, windfalls, or other similar sources. In some cases, low-income families whose housing preferences are very high will elect to spent as much as 50 per cent of their income on shelter in order to obtain adequate quarters. For a more complete discussion of this group, see Chester Rapkin, "Can the American Family Afford an Adequate Home?" Marriage and Family Living, XVII (May, 1955), 138142.

INTRODUCTION

25

enable many families to obtain adequate homes or to force demolition of all substandard units. T h e occupancy of 9,000,000 substandard dwelling units by lower-income families is evidence enough. 3 As a consequence, there has been growing pressure for an expansion of low- and middle-income housing programs, for a massive attack upon blight, and for a huge increase in the clearance of slum areas. About the nature and size of such programs, however, there is much controversy, reflecting lack of agreement as to how and how well the housing market functions. It is the view of some analysts, for example, that the present rate of new construction is not keeping pace with the aggregate housing requirement brought about by family formation, deterioration of the existing stock, and the excess of demolitions and withdrawals over net conversions. They feel that the current volume of starts must be immediately stepped up to as high as 2,000,000 units a year, or by about 50 per cent, if the housing need of the coming two or three decades is to be met. Others are of the opinion, however, that the relationship of price movements in the existing stock to cost and price movements of new construction make this occurrence improbable in the private market, but that housing standards will improve anyway. T h e issue with respect to new construction is whether and under what circumstances home building can induce a high level of abandonment among substandard units (i.e., significantly shorten the economic life of this portion of the dwelling-unit inventory before a generally rising vacancy rate and declining prices act to limit new construction). Complementarily, to what 3 See Table 21 and discussion in first part of Chapter VII.

26

HOUSING MARKETS AND PUBLIC POLICY

extent and under what circumstances can voluntary rehabilitation be expected to raise the quality of substandard units if the injection of new private rental and sales construction into the supply fails to bring about their abandonment? The deterrent effect of vacancies and of falling prices and rents on new construction differs considerably among various housing submarkets and in particular between the renter and owner-occupancy sectors. T o determine whether and how the pace of new construction might be stimulated, therefore, it is necessary to understand how changes within the supply take place in various submarkets and also to know more about the mobility and other strategic demand characteristics of the population residing in each of these submarkets. The same types of information are necessary in the development and implementation of effective programs to control and reduce blight. Currently, however, although we have a large array of data on housing, relatively little is known about the interrelationships among submarkets or the factors affecting changing occupancy, levels of maintenance, intensity of utilization, and volume of new construction. It is the purpose of this volume to examine these aspects of the housing market both theoretically and empirically in order to provide some guides to the resolution of major issues in housing policy and to stimulate further research. PRIOR STUDIES

It may seem strange in light of the widespread interest in the subject that scant attention has been devoted to the process of market change within the existing housing supply, the manner in which the stock is allocated, and

INTRODUCTION

27

factors associated with changing levels of quality within subsections of the inventory and for the stock as a whole. There has been research into aspects of the problem, such as slums, mortgage financing, price trends, changing tastes, and rent control. These have focused, however, on specific segments of a market. Few analysts have been able to come to grips with the more complicated interrelationships among submarkets and the housing market as a whole. This is explained principally by the difficulty in obtaining empirical data. Seldom have there been the resources to do work similar to Leo Grebler's Housing Market Behavior in a Declining Area,4 for example. As a consequence, theories about housing markets have been based on scraps of data and have only slowly been put to test. With data from the 1956 National Housing Inventory 5 and succeeding inventories conducted by the Bureau of the Census, it is hoped that this situation will improve. This study builds primarily on the unpublished Ph. D. theses of Smith and Maisel, on Fisher's Urban Real Estate Markets, and on Rapkin, Winnick, and Blank, Housing Market AnalysisTo the above contributions, the present volume is but a small addition. It attempts to develop theories around these earlier works rather than 4 New York: Columbia University Press, 1952. 6 U. S. Department of Commerce, Bureau of the Census, 1958. Hereafter referred to as the NHI. 8 Ernest M. Fisher, Urban Real Estate Markets: Characteristics and Financing (National Bureau of Economic Research, 1951); Sherman Maisel, "An Approach to the Problems of Analyzing Housing Demand," unpublished Ph. D. dissertation, Harvard University, 1948; Chester Rapkin, Louis Winnick, and David M. Blank, Housing Market Analysis (Housing and Home Finance Agency, 1953); Wallace F. Smith, "An Outline Theory of the Housing Market with Special Reference to LowIncome Housing and Urban Renewal," unpublished Ph. D. dissertation, University of Washington, 1958.

28

HOUSING MARKETS AND PUBLIC POLICY

trying to integrate their common features into a unified theory of the market. T h u s there are many loose ends with respect to income-demand and price-demand relationships, the role of housing quality, space, and location in consumer choice, and the sociology of family decisions regarding housing expenditures, to name a few. A longer period of analysis might have corrected these deficiencies, but also would have rendered the data obsolete. In brief, the study is tentative and exploratory and reaches no firm conclusions. It seeks instead to encourage analysts to view the market differently, pursue new lines of inquiry, and organize existing data in a different fashion.

ORGANIZATION OF T H E STUDY

T h e lines which this inquiry takes parallel the various interests in the subject. First, in Chapter II, an attempt is made to develop a theoretical framework within which the housing market may be analyzed. T h e focus here is on the elements of market structure that seem to be strategic in determining competitive relationships among various parts of the supply. T h e investigation then turns in Chapter III to the concept of filtering which has been used, if less than successfully, to handle some of the theoretical problems surrounding market dynamics. A brief description of the general theories of filtering is presented and an attempt is made to shed light on various facets of the process by exploring these theories in some detail. In Chapter IV the exploration of market dynamics continues with an examination of recent price and rent changes in the housing stock in several metropolitan areas. These data are used to point up several of the more important theoretical questions raised in Chapter II and

INTRODUCTION

29

their relationship to the housing problems of the lowincome family. T h e study next discusses in Chapter V some selected aspects of the problem of raising the rate of new construction. Included in this discussion is a special, if brief, treatment of the role of liberal mortgage credit in the past and its possible role in the future. Chapter VI is directed to the problems involved in maintaining the standing stock and raising its average quality. Finally, the closing chapter suggests some policy implications of the findings and analyzes several approaches to and problems of urban renewal.

Il The Market Structure

Our purpose in analyzing the housing market, or for that matter any market, is to achieve the understanding necessary to predict and direct change. The potential for change—a shift in price or rent levels, occupancy, or quality or quantity of stock—in a given residential submarket arises when the supply of housing increases or decreases relative to demand. Most commonly, this situation is brought about by absolute changes in the number of units in the standing stock and by changes in the characteristics and preferences of the population. In either situation, the potential can be viewed as being created by shifts in the supply or demand functions for housing. The potential will be less than fully realized to the extent that owners accept a change in vacancies rather than in prices or rents and equally to the extent that alterations in the underlying structure of supply and demand do not yield a market response. The shifts of a supply or demand schedule that result from factors such as new construction, changing prefer30

THE MARKET STRUCTURE

31

ences, etc., vary according to the type of supply and also with the characteristics of the families who occupy the units. As a consequence, housing market studies have traditionally focused on individual sectors of supply or demand. Pursuing a form of partial demand or microanalysis, they have looked at the new construction market or the low-income market, or the rental or owneroccupancy markets, individually but not as part of a composite whole. A t the other end of the scale, there have been a few quite competent aggregate analyses of the market,1 but these have not examined simultaneously the component parts. T o this generalization, there are a few exceptions. Fisher's theory of the relationship of new construction to the standing stock is a form of macroanalysis which incorporates submarket relationships.2 T h e present author, in a handicraft approach, divided the Philadelphia area housing market into a matrix of submarkets according to location, tenure, value, and race of occupant and attempted to trace through the effects on each submarket of aggregate changes in population, income, and employment location. 3 This model, however, had no automatic feedback mechanism which would correct for improbable results. Moreover, it was incapable of illuminating a number of important policy questions regarding new construction and maintenance of the existing stock. 1 Notably Smith, op. cit. 2 Ernest M. Fisher and Robert M. Fisher, Urban Real Estate (New York: Henry Holt, 1954). 3 Chester Rapkin and William G. Grigsby, The Demand for Housing in Eastwick (Philadelphia: Institute for Urban Studies, 1960). For a more sophisticated approach to the problem of predicting the locational distribution of new construction, see John D. Herbert and Benjamin H . Stevens, " A Model for the Distribution of Residential Activity in Urban Areas," Journal of Regional Science, I I (Fall, 1960), 21-36.

32

HOUSING M A R K E T S A N D P U B L I C

POLICY

There have been other attempts at model building, but there is still a vital need for some form of matrix analysis which will enable us to see at one time the aggregate market, the individual parts, and the interrelationships of these parts. T h e need is particularly crucial at this time, when vast sums of public money are being directed into urban renewal programs without clear knowledge of their ultimate impact. T o suggest just one of many strategic questions which present analytical techniques do not illuminate—to what extent do programs of conservation and rehabilitation compete with and depress the volume of new construction and thus hinder our efforts to expand the supply of housing? Equally, under what circumstances might an expansion of supply have an unfavorable impact on levels of maintenance in the standing stock? Clearly, changes in the various housing submarkets do not occur independently and in isolation. Through some form of matrix analysis, we should be able to identify the external and internal forces of change and trace their impact through various submarkets in a systematic fashion. T h e purpose of this chapter is to work in the direction of matrix analysis in order to develop the concept of interdependency of submarkets and illuminate several significant relationships. T h e formulations are not rigorous. Rather an attempt is made to outline a general approach that might be fruitful, with modifications, for further inquiry. In essence, this is done by describing the matrices of supply and demand and showing how the two intermesh. T h e joining of supply and demand in the housing market has one unique feature which merits special attention. As nearly every elementary discussion of housing points out, in the market for shelter, unlike most other

THE MARKET STRUCTURE

33

markets, the article of commerce must virtually always be consumed at the point where it is produced. When a family no longer wants to use the stream of services that a particular dwelling unit provides, it ordinarily cannot have the unit disposed of, as it would a car or refrigerator, and replaced on the same site by one which better suits its needs. T h e dwelling unit is immobile, so the family must move. T h e shifting needs and desires of families are met by moving from one market or submarket to another. In aggregate, these moves may cancel each other out, leaving the demand curve for housing unchanged. More typically, however, their net effect is to create upward pressure in some submarkets and downward pressure in others. In short, a shift in demand means movement, and usually, though not always, movement means a shift in demand. Clearly, the elements that control the mobility of families also affect the ease or difficulty with which supply and demand are brought together and thus may be extremely important in setting the rate at which the stock flows from one income group to another. The second part of this chapter, therefore, analyzes residential mobility as it applies to the various components of supply and demand and their resolution in the market. HOUSING SUBMARKETS—COMPONENTS OF SUPPLY

"A housing market area is the physical area within which all dwelling units are linked together in a chain of substitution. . . . In a broad sense, every dwelling unit within a local housing market may be considered a substitute for every other unit. Hence, all dwelling units may be said to form a single market, characterized by inter-

34

HOUSING MARKETS AND PUBLIC POLICY

actions of occupancy, prices, and rents. However, this view can be maintained only for the most general analysis and even then with great difficulty." 4 In reality, the housing market in a given area consists of groups of submarkets which are related to one another in varying degrees. T h e test of whether two dwelling units are in the same submarket is "whether substitutability is sufficiently great- to produce palpable and observable cross-relationships in respect to occupancy, sales, prices, and rents, or in other words, whether the units compete with one another as alternatives for the demanders of housing space." 5 T h e definition of submarkets is, of course, imperfect and somewhat arbitrary. " T h e r e may, indeed, be closer interrelationships between units o f . . . two classes than between units within the same class." 6 This is because in the real world there are no clean cutoff points between two submarkets, the chain of substitutions being a continuum with sharp breaks or gaps being the exception rather than the rule. Nevertheless, where the distance between two units on the continuum is large, they become weak substitutes and the price or rent behavior of one does not affect the other. Or to put the matter differently, if the distance on the continuum is great, the units will be good substitutes for only a small number of families. T h e units would be in different submarkets or perhaps even in different total markets. T h e linkages between submarkets need not be direct. Bargain house prices in Area A might be completely ignored by potential home buyers in Area C if the latter area were too far distant. These prices might, however, 4 Rapkin, Winnick, and Blank, op. cit. pp. 9-10. 5 Ibid., p. 10. 6 Ibid., p. 11.

T H E MARKET STRUCTURE

35

attract a segment of the market from Area B to Area A. This shift might in turn create values in B which would serve to capture a segment of the potential in C. Similarly, although expensive dwelling units may never drop in value far enough to affect prices directly in the lower quality market, they may do so indirectly by initiating a chain reaction on the price continuum. Thus, $20,000 units could move downward to $15,000, causing $15,000 units to decline to $12,000 and so on. It is generally reasoned, and no doubt correctly, that the effect would gradually dissipate as it continued along the chain and that the longer the chain, the less the possibility of a market change at one end appreciably affecting the other end. The linkages are also not necessarily of equal length in both directions. For example, a price decline of 10 per cent among medium-priced single-family homes in Suburb A might reduce the demand for lower-priced homes in Suburb B, but a similar price decline in B might not have any effect on the market in A. A striking example of lack of symmetry is provided by a comparison of the owneroccupancy and rental sectors of the market. Because renters have relatively greater mobility than owners, bargain prices in the single-family home market would generally result in a more significant shift in tenure than would be the case if correspondingly low offerings became available in apartment structures. Since directly or indirectly most of the cells in the matrix of housing submarkets are linked, the effect of a price or rent change within one submarket is diffused among numerous submarket channels. T h e greater the diffusion, the less the effect in any one submarket. T h e portion of the original effect that is diffused will depend

36

HOUSING MARKETS AND PUBLIC

POLICY

on the number of submarkets with which the first market is linked and the length of the connecting channels. T h e portion that goes to a particular submarket will depend to a degree on the number and length of the other channels. This is simply another way of saying that the submarkets are interdependent. Attenuated links between submarkets such as those created by racial prejudice or inadequate transportation facilities are barriers to diffusion and cause price and occupancy changes to be confined to one or a few submarkets with considerable excesses or shortages being the result. 7 In the case of excesses, units will decline in value to the reservation price or rent of the owner and then stand vacant or undergo conversion or withdrawal from the stock. T h e effect of the long links or gaps in the continuum in confining downward shifts in value to a single sector of the market is to benefit greatly buyers and renters in that particular sector. If this occurs in the lower-priced sections of the inventory, it is, of course, much to be desired from a social point of view. At higher levels, however, it serves only to limit severely the potential for downward price movements generally. The Several Continuums. Because the commodity, housing, embraces such a wide variety of individual products, it may be helpful, in trying to understand the basic underlying competitive relationships, to think of the chain of substitution connecting each dwelling unit or submarket with every other unit or submarket as being composed of a number of distinct links, each link representing a characteristic which would distinguish one dwelling unit or TSee William G. Grigsby, "The Residential Real Estate Market in an Area Undergoing Racial Transition," unpublished doctoral dissertation, Columbia University, 1958, Appendix A.

THE MARKET STRUCTURE

87

group of units from another. Thus, there is a location link, tenure link, type of structure link, value link, and so on. T h e lengths of the links are not equal, varying according to their effect on demand. For example, in three areas, A, B, and C, adjoining each other linearly, the location link connecting the homeownership market in A with that in C would be longer than the link connecting the homeownership markets in A and B. Both might be longer, according to our empirical evidence to be presented in a later chapter, than the tenure link connecting the owner-occupancy and rental markets in A itself. T h e combined distance of the links between two markets reflects the degree to which price or rent changes in one market will not affect the other. 8 T h e distance, however, does not measure the extent to which prices or rents in the tWo markets actually do move independently since both markets may be governed by identical forces over long periods of time. Shifting Linkages. As is apparent from the preceding discussion, the competitive relationships among submarkets are in a continual state of flux. A new highway or bridge may shorten the location link between A and C and thereby lengthen, relatively, the link between A and B. Poor maintenance in a declining area, D, may reduce the length of the condition link between that area and a nearby slum, S, but lengthen the corresponding link between D and a neighborhood of higher quality. Moreover, if D approaches S in quality, the result would probably be quite different from that which would occur if 8 T h e distance could be conceived of as Euclidean in n-dimensional space. This, however, introduces certain conceptual difficulties which dictate against its use here.

38

HOUSING MARKETS AND PUBLIC

POLICY

S approached D. Some links may disappear as submarkets merge; others may be created as new submarkets come into being, either through new construction or a shift in the competitive structure. Still other links may become negative as dwelling units exchange relative positions on the quality, condition, location, or other scales. Thus house A and house B may in Period One be very poor substitutes because" of the superior location, size, and quality of A. In Period Two, A declines in quality to the level of B; that is, the quality link disappears, and the two are somewhat closer substitutes. Now if in Period Three, A continues to decline, a quality link will re-emerge. This time, however, it will be negative, implying that it counteracts the effects of the size and location links. Theoretically, the negative link could exactly offset the positive links so that A and B were perfect substitutes even though all their characteristics were different. Any family interested in the one home would be equally interested in the other. It is doubtful whether this ever occurs, but the general proposition of negative links is consistent with casual observations of the market. A medium-priced row home in a renewal section of downtown Philadelphia, for example, is a much better substitute for a brick colonial on the Main Line than is any similar row home on the Main Line itself. The linkages among submarkets are, of course, merely composites of linkages among individual houses in these submarkets. The composite and individual linkages between two submarkets should be quite similar. Nevertheless, within a given submarket some dwelling units may be affected differently than others by events and trends in the market. Negroes might migrate into one part of a submarket but not into other parts. Maintenance

THE MARKET STRUCTURE

39

by some homeowners might be superior to that by other owners. Homes that once were owner-occupied may be rented, and so on. In general, the dwelling units whose individual linkages deviate the most from the composite linkages in a given market period would be expected to be the ones whose linkage shifts would deviate most from the composite shift over the course of time. In any event, as the individual linkages do shift independently of the composite, some dwelling units will pass from one submarket into another. Thus the size and number of submarkets as well as the linkages among submarkets are in the process of perpetual change. This dynamic aspect of the matrix means, of course, that each time the market moves to a new equilibrium position, the coefficients in each cell of the matrix have probably changed. This, in turn, implies that the matrix would be extremely difficult to manipulate empirically even if data were available for insertion into the model. T h e literature on housing, it should be pointed out, stresses just the opposite point, that the inventory is altered quite slowly because annual volumes of new construction, conversions, and demolitions are so small relative to the total size of the standing stock. This view is not completely accurate. In the Philadelphia Standard Metropolitan Area (SMA), for example, fully 40 per cent of the dwelling units in existence in 1956 were not in the inventory in 1950. 9

Linkages among Dissimilar Groups of Dwelling Units. Because

of the difficulty of defining submarkets by actual measurements, most analysts at present simply divide the total market into several more or less homogeneous groups on the assumption, correct in part, that units with similar 9

NHI.

40

HOUSING MARKETS AND PUBLIC

POLICY

characteristics are good substitutes. Thus, submarkets have been classified according to one or more of the following: type of structure, types of rights or tenure, price or rental class, location, age, quality, condition, or size. T h e greater the number of characteristics specified and the greater the number of categories for each characteristic, the more submarkets that result and the higher the degree of substitutability within each. T h e analytical matrix for a given metropolitan area might include as many as fifty or more submarkets. Whether many of the submarket distinctions which are made are of real significance in the market place is something that is not always known in advance of the actual analysis, if at all. More serious, the conventional approach completely ignores one of the key features of housing markets, the fact that some of the closest linkages are between completely different housing types. T h e reason for this high crosselasticity, moreover, lies in the differences themselves. T h e relationship, described below, is due to the interaction of the market and nonmarket supply of housing. T h e linkages discussed thus far refer to dwelling units that are on the market for sale or rent. For this group it is almost a tautology to say that similar dwelling units will be close substitutes. But there is, in addition, an extremely close and delicate relationship between the supply of housing on the market and the supply in use. £ach home available for sale is a possible alternative accommodation to one currently occupied. This is true, of course, of all consumer durables New cars must compete not only with used cars on dealers' lots, but also with those in family garages. T h e crucial point is that for the owner of a home, or a car, or a stove, or refrigerator, goods on the market which are identical to his own are

THE MARKET

STRUCTURE

41

not perfect substitutes; they are extremely poor ones. Nothing is to be gained by a trade, and typically an exchange would involve considerable cost. In the case of housing, the costs, in the form of moving expenses and fees incident to the transfer of title, are quite high, As a result, the good substitutes for a family already ensconced in a home are structures which are entirely different. Many families, for example, as their incomes, needs, and preferences change, become somewhat dissatisfied with their living accommodations and begin to cast about for something better. Appraising all factors, including moving costs, however, they cannot quite decide between the old row house in the city and the big new home in the suburbs, or between their suburban home and a downtown apartment. They often are on the verge of a decision to buy or rent for years at a time, during which period the home they occupy and the completely different homes offered on the market become extremely close substitutes. Any small shift in price or quality, or downpayment requirements, or family circumstance might be enough to precipitate a move. It is not necessary that the dwelling unit on the market be superior to the one being occupied, but only that it be a better alternative for the family in question. And to be a better alternative, it must be different. By contrast, it would take a significant drop in new home prices to motivate a family to discard its current dwelling and buy an identical structure in a new development two blocks down the street. Moreover, if the new and used structures and their surroundings were indeed virtually identical, the price decline among the new homes would be almost immediately transmitted to the existing stock and cancel any potential financial ad-

42

HOUSING MARKETS AND PUBLIC

POLICY

vantage of a move.10 With respect to submarkets that were entirely different, however, the transmission of the price impulse would be slow and incomplete. 11 Thus, the price structure reinforces the basic relationship. What has been said thus far may appear to be an elaboration of the obvious. T h e creation of style obsolescence in clothes, automobiles, and other products has been a widely practiced and widely deplored strategy of private enterprise for years. From recent pronouncements concerning the plight of residential construction, the importance of nonprice competition seems to be recognized among many persons in real estate and home building as well. The concept, however, has not been formally incorporated into housing market theory, as is witnessed by the fact mentioned earlier that for purposes of analysis we continue to divide up the total market into the traditional homogeneous groups and study them in isolation. There is a general recognition of the movement of families during their life cycle to different types of accommodations—from rental to owner-occupancy and from cheaper to more expensive dwellings and then in some cases back to rental quarters and back to cheaper accommodations. There has been a failure thus far, however, to explore the possibility of systematic and predictable relationships among various dissimilar sectors of 10 Reflecting the extremely high degree of cross-elasticity between the two markets when measured in the conventional fashion. 11 There would be some transmission of the price change from A (the market to which the families move) to B (the market from which they come) even though A and B serve completely different demand groups. This is because each family that moves from B is not only a demander in A but a supplier in B. Too many such suppliers could depress the market in B. Obviously, the more markets from which A draws, the less the price effect in any single market and the fewer the number of potential buyers who will be deterred from purchase because of inability to sell their home at an adequate price.

THE MARKET

STRUCTURE

43

the market and nonmarket supply. Yet the most strategic linkage insofar as public policy is concerned is between new construction and existing homes not yet on the market. Knowledge of this linkage would be extremely helpful in formulating programs to expand the housing supply and improve its quality. For example, how can the so-called dominance of the standing stock be overcome by providing close links with new construction at some points in the supply and lengthening the chain of substitution elsewhere? And to repeat a question raised at the beginning of the chapter, in what situations are programs of rehabilitation competitive with new construction and under what circumstances are they complementary? These are the types of questions that might be answered by a better understanding of the marketnonmarket matrix. We pursue these questions in Chapters V and VI, but, for lack of much empirical evidence, almost exclusively on a theoretical plane. Approaches to Matrix Analysis. Our goal is a matrix of housing submarkets which can help us predict the impact of economic and social trends, and particularly governmental actions, on various sectors of the supply. T h e difficulty of constructing such a matrix should by now be apparent. T h e submarkets are linked together by a number of factors which cannot be readily reduced to quantitative terms, much less combined into a single link or coefficient. T h e matrix itself is in a constant process of change, as the exogenous variables whose impact on the market we seek to trace have the added effect of permanently altering the market structure itself. T h e linkages among dwelling units on the market are quite different from those connecting units on the market with those in the nonmarket supply. Finally, there are numer-

44

HOUSING MARKETS AND PUBLIC POLICY

ous internal submarket characteristics which must be analyzed in developing, even descriptively, submarket linkages. All these facts suggest that construction of a single matrix which will answer all our questions is impossible. W e can, however, do a better job of identifying strategic submarket relationships in a few simple matrices, each of which can illuminate a specific problem. A number of approaches suggest themselves. T h e first is a matrix of cross-elasticities since our description of the market in terms of the substitutability of groups of houses is in essence an extension of this concept. Briefly, crosselasticity of demand measures the degree to which a price rise or decline among one group of homes would result in an increase or decrease of demand for houses in a second cluster, holding prices in the second cluster constant. If the impact on the second group were quite substantial, the two groups would be considered to be close substitutes and in the same submarket. If the impact were somewhat less, the two clusters might be regarded as being in the same housing market but not in the same submarket. T h e low-cost new construction cluster and the slum housing cluster in a particular city might be an illustration of this relationship. Finally, if no impulse were transferred between the two groups, they would be in completely separate markets. Although the concept of cross-elasticity is useful in helping us identify clusters of close substitutes, it has a number of important limitations for our purposes. First, it describes only a price-demand relationship. With respect to some consumer goods this might be quite adequate, but in the case of housing, shifts of demand among submarkets are associated with many types of changes in supply other than price—physical condition, relative locational

THE MARKET STRUCTURE

45

advantage, tenure, and relative quality, to name some of the more important ones. Although these changes may sometimes affect price first, then demand, this is not always so. Moreover, it is vital to an understanding of the market that we establish the relationship of many of these variables to demand directly. A second limitation of the concept of cross-elasticity is that it does not by definition try to describe the conditions of the real world. In order to isolate the effect of price change in Market A on demand in Market B, prices in B are held constant. Clearly, however, if A and B are good substitutes, any demand change in B would soon be largely negated by a corresponding price change. Finally, a matrix of cross-elasticities does not establish the interdependency of the submarkets. It only combines relationships among a series of pairs into a single table. All of these objections could be met by relaxing the definition, but serious definitional and empirical problems would still remain. Considering the available data, two other avenues of inquiry seem to have a higher probability of yielding immediately useful results. T h e first of these concentrates on demand and consists essentially of an examination of changes in occupancy patterns. T h e second approach would focus on supply through an historical analysis of absolute and relative value shifts among various submarkets. It may be seen that together these two approaches cover the two distinct facets of the filtering process—shifts in occupancy and changes in value. W e will examine the value approach briefly here and then turn to the question of movements of households in the next section of the chapter. If linkages among submarkets did not change over time,

46

HOUSING MARKETS AND PUBLIC POLICY

price and rent shifts from whatever cause would occur in the same direction and to the same degree throughout the market, since value itself is a link in the chain of substitutions.12 In a changing urban structure such as we observe today, however, there is a continual realignment of submarkets and, consequently, differential shifts in value. Through an analysis of these shifts, we can obtain an initial approximation of the alterations in submarket relationships. Since price and rent movements are the composite result of a number of underlying forces, they do not provide the final answers but do point up areas for further investigation. Supplemented by information on vacancies,13 they provide a direct entree to analysis. There is a tacit assumption in these remarks that dwelling units in closely linked submarkets will have similar price behavior.14 While it is true that prices in two markets in which the products are close substitutes should move in the same direction, the percentage change need not be the same in both markets. This would occur only if the supply elasticities at the point of intersection 12 In this situation there would be filtering in the conventional sense, but not according to the Fisher-Winnick formulation, in which filtering is defined as a change in the value of a house relative to the distribution of all housing values in a community (Ernest M. Fisher and Louis B. Winnick, "A Reformulation of the Filtering Concept," Journal of Social Issues, VII [1951], 47-85). For a more complete discussion of this and other concepts of filtering, see Chapter III, If the price and rent shifts resulted from a general rise or decline in the number of households and not from a change m preferences or incomes, the linkages could probably remain the same only in the short run. Over the longer term, some families would attempt to return to their old rent-income relationship and thus cause a shift in values in some but not all sectors of the market. 13 In which changes are, as pointed out previously, to some extent the complement of movements in prices and rents. 14 As for the complementary assumption that similar price behavior means closely linked markets, we have already pointed out that this is not always so.

THE MARKET STRUCTURE

47

between supply and demand were the same. In the very short run, similar elasticities seem improbable, but should develop over a somewhat longer term. In all, it would seem that much could be learned through an examination of varying price and rent patterns among hypothesized submarkets. There have, in fact, already been a few attempts in this direction.15 Using data from the NHI, an attempt is made in Chapter IV to push somewhat further. At present, however, none of the price data is organized in such a way as to facilitate this approach to the analysis of housing markets. HOUSING SUBMARKETS—COMPONENTS OF DEMAND

As pointed out in the previous section, the housing market tends to be compartmentalized into segments characterized by different kinds of housing. These different segments are to some extent insulated. from one another because different types of families are in the various markets. In the absence of a channel between markets, that is, a group of families who seriously consider more than one submarket as a place of residence, upward or downward price movements can persist independently in different parts of the market for considerable periods. For example, prices and rents of dwelling units in New York and Philadelphia move quite independently of one another because housing accommodations in the two cities are regarded as close substitutes by an extremely small segment of the populaticn. In other 15 For example, see Nohad A. Toulan, "The Filtering Process: A Conceptual Reappraisal," unpublished paper, Department of City Planning, University of Pennsylvania, 1961.

48

HOUSING MARKETS AND PUBLIC POLICY

words, the linkages among submarkets are, in reality, families T h e link distance between two submarkets is determined by the proportion of families in the first market who would react to a given change in the second submarket or vice versa. T o obtain a clear picture of the market process and the potential for value and occupancy shifts under various circumstances, therefore, one must have an understanding not only of the types of submarkets classified according to the attributes of supply, but also of the types of families that move among these structures and submarkets. With this knowledge, a change in submarket linkages can be analyzed in terms of the number and types of families likely to be affected.

Family Characteristics Associated with Attributes of Supply. There are several ways in which families could be classified for the purpose of analyzing trends in prices, rents, quality, condition, or other housing market problems. Most commonly, families are grouped according to characteristics which it is felt may be associated with a particular submarket. These characteristics would include such variables as age and sex of head, family income, race, family size, and employment location of head. By constructing a matrix of these characteristics for each submarket in a given area, a picture would be obtained showing the tendency of various types of families to group themselves in particular submarkets and, in the process, some of the possible linkages between these markets. An example of one such matrix for a single submarket in the Philadelphia SMA is given in T a b l e 1. For a total view of the distribution of families among various types of accommodations, a similar table would be required for each of the other submarkets in the metropolitan area.

THE MARKET STRUCTURE

49

TABLE 1 PROPORTION OF HOUSEHOLDS IN PHILADELPHIA STANDARD METROPOLITAN AREA LIVING IN CENTER CITY APARTMENTS BY F A M I L Y T Y P E , AGE OF H E A D , FAMILY INCOME, AND E M P L O Y M E N T LOCATION, 1 9 5 7 FAMILIES WITHOUT CHILDREN INCOME AND PLACE OF EMPLOYMENT

A g e of H e a d of Household (Per Cent)

FAMILIES WITH CHILDREN

^ G FX

Under 65

45-64

35-44

10.9

2.0 1.2

3.5 0

0.5 0

0.2 0.2

1.2 0.9

9.4 ? 9

8.9

15.5 0

1.6 0

0.1 0

4.2 3.3

0.3

#

0.3

0.2

»

•

0 1

#

0

0

#

«

0.6

0.5

0.5

0.1

#

0.2

35

$5,000—$9,999

Works in center city . . Does not work

$10,000 a n d

up

Works in center city . Does not work

$5,000 a n d

8.2

up

Works elsewhere than center city

Under $ 5 , 0 0 0 Total Total

1 9

SOURCE: Chester R a p k i n a n d W i l l i a m G. Grigsby, Residential Renewal in the Urban Core (Philadelphia: University of Pennsylvania Press, 1960), p. 48. * Less than o n e - t e n t h of 1 per cent.

Such a matrix, of course, provides only a rough insight, since it does not show how many families consider any two or more submarkets fairly close substitutes. With additional data, however, it would be possible to transform the matrix into one that reveals this information. One way in which this might be done will be briefly explained, using data from the NHI. In the first half of this chapter, we described the vast

50

HOUSING MARKETS AND PUBLIC POLICY

difference between a matrix of market supply and one joining dwelling units for sale or rent with the rest of the inventory. Our example will relate to the former type, with analysis of the latter to follow. With respect to the sector of the inventory on the market for sale or rent, perhaps the best clue as to what the linkages among submarkets might be is to be found in the experience of recent buyers and renters. Their housing preferences and buying performance should not vary greatly from those of similar families currently in search of a home. 16 A distribution of recent buyers in the Philadelphia SMA is presented in Table 2, which divides this group according to family income, employment location of the household head, and location and market value of the living accommodation which the household purchased. T o translate this table into a matrix expressing relative degrees of substitutability among submarkets, we must, in the absence of actual data, introduce some assumptions as to the probable second choices of the purchasers. T h e assumptions used here were designed to maintain a degree of both plausibility and simplicity. They are not based on field research and the reader should not feel compelled to judge whether they are all correct. They are presented below in order that the relationship between the matrix and the assumptions or facts on which it is based may be better understood. Our first assumption is that all of the buyers gave serious consideration to more than one house. Second, the closest substitute for 70 per cent of the purchasers was another home in the same submarket. For the remaining 30 per cent, however, the second preference was a home in one of the other submarkets. A modest change, not 16 A matrix of all households would, for obvious reasons, be misleading.

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THE MARKET STRUCTURE

63

4. Intra-area migrants who shift to a different type of structure or to a different tenure status. A slight variation of this classification system has been used to group households that moved to, within, and from the city of Philadelphia and the Philadelphia SMA in 1955 and 1956 (Tables 7, 8, 9 and Charts B through G).19 T h e categories could be further subdivided by income, family type, or other factors deemed appropriate for a particular analysis. It may be seen that each of the four components of Group I has its counterpart in Group II. The two components of each of the four pairs do not, however, necessarily seek or vacate the same type of housing. Inmigrators to many metropolitan areas may, on the whole, seek more or less expensive homes than outmigrators vacate. New households may desire less expensive homes than are made available by death and family dissolution, and so on. Thus, as the relative numerical size of these groups varies back and forth, as it has in recent years, so too does the impact on the various submarkets. T h e impact may at times be quite severe because the supply of housing is very slow to adjust to shifts in demand. Since each of the four types of moves in Groups I and II will create the potential for an adjustment in values, it would appear that some of the conventional thinking about market flows is not quite correct. There is a suggestion in some discussions of the subject that the flow of stock to (from) lower-income groups is associated almos>t exclusively with the movements of families to better (inferior) dwelling units. This in turn leads to a mistaken 18 See also Richard U. Ratcliff, Urban Land Economics (New York: McGraw-Hill, 1949), p. 323, for a similar classification system.

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MOVEMENTS OF PRICES AND RENTS

139

of identifying various submarkets and the favorable and unfavorable forces affecting them. According to our previous definition of a submarket in terms of cross-elasticity, a necessary but not sufficient characteristic of houses in the same submarket is that they have similar price or rent movements. 5 Thus, all units in a given housing market area which advanced, say 20 per cent, from 1950 to 1956 may be in the same submarket, though not necessarily so. They certainly are not, however, in the same submarket as units that declined by 20 per cent, though at one time they may have been. It may be possible then to distinguish submarkets primarily in terms of price movements and then to identify the forces behind these movements, in order to determine whether they might behave differently in the future or fluctuate in such a manner as to shift a unit or group of units into a new submarket. This procedure would be facilitated if the distributions of changes in rents and values could be crossed by various property characteristics such as age, location, racial composition of neighborhood, price or rent level, etc. Such a procedure would amount to a type of price-index analysis, but might be somewhat more revealing than the conventional indices. PATTERNS OF PRICE AND RENT MOVEMENTS—I

Of the several cross-tabulations suggested above, the one most pertinent to the present volume is that between value (rent) movements and value (rent) itself, since by relating these two variables, some rough measure can 5 Some factors may affect all submarkets equally, so similar price movements are not by themselves sufficient evidence that the homes experiencing these movements are in the same submarket.

140

HOUSING MARKETS AND PUBLIC POLICY

be made of the flow of dwelling units to lower-income families. The next few pages of this chapter are devoted to a calculation and analysis of this flow. In estimating the volume of downward movement in various value and rent brackets, it seemed necessary to make allowance for inflationary trends throughout the economy, so the NHI data were translated into constant dollars. In effect, then, the measurement is simply depreciation in constant dollars, the concept of filtering used by Lowry. For this reason, the term "filtering" is used in several places in the ensuing discussion. The measure itself, it will be recalled, tells us only whether housing costs in a particular sector of the stock rose more or less than living costs generally. It was decided that any dwelling unit that had not experienced a price or rent rise of at least 13 per cent, the over-all cost of living increase for the country from 1950 to 1956,6 would be regarded as having filtered. Having selected the 13 per cent figure, there remained the problem of determining which units had not appreciated by this amount. Clearly, those which dropped to a lower value or rent bracket had not. But those which remained in the same category could have moved either up or down in value. Also, some of the units which shifted to the next higher bracket may have appreciated less than 13 per cent. Lacking the basis for any better judgment, all the latter units were assumed to have filtered up. To solve the 8 As measured by the consumer price index of the Bureau of Labor Statistics. It is generally agreed that this index overstates the real increase in the cost of living, but there is no agreement as to the amount of error. T h e published figure was, therefore, used. See The Price Statistics of the Federal Government (Price Statistics Review Committee, National Bureau of Economic Research, 1961). T h e rationale for using a deflator that includes housing costs is presented in Chapter III.

MOVEMENTS OF PRICES AND RENTS

141

question of intracell movements, the following procedure was used. It was assumed that if prices or rents of all dwelling units in a given cell rose 13 per cent or more, the bottom portion of the cell would be vacant. Thus, in the rent bracket $40-$49, if no units filtered down from 1950 to 1956, there would be no rents below $45.20 (113 per cent of $40). It can be seen in Table 11, however, that of the dwelling units renting for $40 to $49 in 1950, some rented in 1956 for as low as $20 to $29. Undoubtedly, therefore, there were a certain number of units in the $40 to $45.20 range in 1956. T o estimate this number, the 1956 rent distribution of units renting for $40-$49 in 1950 was plotted and the area under the portion of the curve lying between the $40 and $45.20 intercepts was calculated as a percentage of the total area between $40 and $50. This percentage was taken as the measure of the proportion of units in the $40-$49 bracket that had failed to keep pace with inflationary price advances. The absolute number of such units was then computed and added to the units which had moved to lower rent categories in order to obtain a total figure. The procedure was repeated for each rent and value group. All units that did not shift down were considered to have moved up. This probably produces a minimum figure for downward and a maximum figure for upward movement. In the illustration cited above, for example no units below $45.20 could be reasonably regarded as having moved up, whereas there are certainly some units above that figure, including a few in the next higher bracket, which have shifted down in the sense that they did not appreciate by as much as 13 per cent. Also, some proportion of the units no doubt remained so close to their original position that it would be most accurate to

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put them in a "no change" category. Failure to do so tends to compensate for the possible underestimate of downward shifts, but does not correct for the probable excesses in the estimate of upward movements. On the whole, therefore, the estimate of downward flows could be regarded as conservative. The figures yielded by these calculations are presented in Tables 13 and 14. It may be seen that the estimate of downward flow is only 16 per cent for rental units and but 15 per cent in the owner-occupied sector. Even these modest figures are misleadingly large from a social point

TABLE

13

ESTIMATED INCIDENCE OF R E N T INCREASES AND REDUCTIONS,* SAME NONFARM RENTAL UNITS, UNITED STATES, 1 9 5 0 - 5 6 DWELLING

CONTRACT MONTHLY RENT

RENTDISTRIBUTION, 1950

Under $20 $20-$29

UNITS

U N I T S HAVING R E N T INCREASES, 1 9 5 0 - 5 6 * "

U N I T S HAVING R E N T REDUCTIONS, 1 9 5 0 - 5 6 *

Number

Per Cent

1,266,000 1,616,000

1,245,000 1,492,000

98 92

21,000 124,000

2 8

$30-$39 $40-$49

1,859,000 1,775,000

1,636,000 1,445,000

88 81

223,000 330,000

12 19

$50-$59

1,086,000

808,000

74

278,000

26

$60-$79

881,000

618,000

70

263,000

30

$80-$99

244,000

139,000

57

105,000

43

$100 or more

147,000

60,000

41

87,000

59

8,874,000

7,443,000

84

1,431,000

16

Total

SOURCE: Estimated from data in the NHI. * Constant dollars.

Number

Per Cent

MOVEMENTS OF PRICES AND RENTS TABLE

143

14

ESTIMATED INCIDENCE OF APPRECIATION AND DEPRECIATION,* SAME NONFARM OWNER-OCCUPIED UNITS UNITED STATES, DWELLING VALUE DISTRIBUTION, 1 9 5 0

CATEGORY

1950-56

UNITS

UNITS T H A T APPRECIATED, 1950-56*

Number

Per Cent

UNITS T H A T DEPRECIATED, 1950-56*

Number

Per Cent

Less than $4,000

1,921,000

1,883,000

98

38,000

2

$4,000-$5,999 $6,000-$7,999

.... ...

1,557,000 1,917,000

1,353,000 1,646,000

87 86

204,000 271,000

13 14

$8,000-$9,999

17

....

1,672,000

1,386,000

83

286,000

$10,000-$14,999 .

2,250,000

1,906,000

85

344,000

15

$15,000 or more

1,340,000

915,000

68

425,000

32

10,657,000

9,089,000

85

1,568,000

15

Total

SOURCE: Estimated from data in the NHI. • Constant dollars.

of view. T h e way in which they tend to exaggerate the incidence of depreciation may be seen by examining the variation in the rate of upward and downward flows among the rent and value categories. In the rental sector a perfect inverse correlation may be observed between the incidence of decline and the 1950 contract rent. T h e lower the rent, the greater the amount of upward movement. T h e higher the rent, the greater the downward shift. Thus, of almost 1,300,000 units renting for less than $20 per month in 1950, over 98 per cent had their rents boosted by more than 13 per cent by the end of 1956. At the other end of the scale only 40 per cent of the higher quality rental units exceeded the mark of inflation. Or to put it somewhat differently, considerably more than

144

HOUSING MARKETS AND PUBLIC POLICY

one-half of the most expensive rental dwellings, as compared with less than 5 per cent of the cheapest units, could not hold their competitive position from early 1950 to the end of 1956.7 Moreover, this general pattern was repeated in each region and metropolitan area, and both inside and outside SMA's and central cities, although the proportion of units that moved downward was greater in some areas than in others,. The story in the ownership sector was somewhat different. Although in each market area the proportion of owner-occupied units experiencing downward movement was almost identical to that for the rental sector, the variation among value categories was considerably different, tending to be more rectilinear. Excluding units valued at less than $4000 or more than $15,000, there appeared to be no significant departure from the average incidence of decline. This difference between the rental and owneroccupied sectors will be discussed later in the chapter. The figures which have been described relate to an atypical period, a time during which the nation shifted from a housing shortage to a generally satisfactory, supply situation in most strata of the inventory. Further, some of the downward price and rent movements may reflect marked deterioration, temporary excesses of construction, or other factors that we either might not want, or could not expect, to continue. Accepting these qualifications, several troublesome questions still present themselves. First, there is the view that older, cheaper properties represent greater mortgage risks and poorer investments 7 It. may be noted in passing that this has the effect of increasing the central tendency of the distribution, and thus tends to deter new construction more quickly than would be the case if the average incidence of decline were spread evenly t h r o u g h o u t t h e distribution. T h i s is explored in more detail in the next chapter.

MOVEMENTS O F PRICES AND RENTS

145

than newer, more expensive ones. Except in so far as low prices may be associated with inferior credit ratings of borrowers, it would appear that such properties are considerably better collateral than most mortgagees realize. Perhaps liberal mortgage terms are being extended on the wrong properties. At the very least, a careful study of the characteristics of foreclosed properties is suggested. Second, in the rental sector the pattern of rent movements presents clear evidence of a housing shortage in the portion of the inventory serving lower-income groups. Yet strangely enough, it is among these same units that the vacancy rate in 1956 was the highest. Over 8 per cent of the units renting for less than $30 (contract rent) were vacant as compared with an over-all vacancy figure for the rental stock of only 6 per cent. It might be assumed that the high vacancies and the upward pressure on lowrent accommodations did not occur in the same market areas. This proved to be partially true. Both vacancy rates and downward value and rent movements were somewhat greater in nonmetropolitan areas than in urban centers. But even in nonmetropolitan areas, the association of a higher rate of vacancy and lesser incidence of market decline in the lower value and rent categories persisted. Another possibility is that families have simply rejected some of the lowest-quality housing in favor of somewhat better quarters in the same general rent range. This interpretation receives only partial support in the NHI statistics. These data document the decline in occcupied substandard housing through demolition and rehabilitation. But the argument presented here requires evidence that the high vacancy rate among low-rent (value) units, which is what we are trying to explain, is either greater in the substandard than in the standard portion or grow-

146

HOUSING MARKETS AND PUBLIC POLICY

ing faster. The NHI figures indicate that, for units available for rent or sale, the rates in both sectors were virtually the same. For all units, including seasonal structures and those held off the market, the vacancy rate was much higher in the substandard inventory, but how much of the difference can be assigned to vacation dwellings alone is not known. It is possible, of course, that the Census criteria used to classify standard and substandard units have failed to distinguish significant quality differences between the occupied and unoccupied portions of the low-price inventory, but this is sheer conjecture. For the present, therefore, there is no answer to the question of why the sector of the inventory which experienced the most widespread incidence of rent and value appreciation also had the highest proportion of vacant units. A third question concerns the wider incidence of decline among high-quality units. T h e hypothetical depreciation curve in the previous chapter would lead us to expect this result. It is also true that similar movements have been observed in the prices of food, clothing, and home furnishings, as well as in the housing market itself in previous years, so such an occurrence should perhaps not be unexpected. 8 Nevertheless, further explanation may be helpful. A rather mundane reason lies simply in the mathematics of the case. The higher the price or rent, the more the potential for a reduction and the less the potential for further appreciation. T h e more a unit moves down, the less the likelihood of it continuing further. Relatively fixed or slowly adjustable costs, such as taxes or heat, make reductions increasingly difficult before they 8 Eleanor M. Snyder, "Cost of Living Indexes for Special Classes of Consumers," Staff Paper 7, in The Price Statistics of the Federal Government, op. cit., pp. 348-358.

MOVEMENTS O F PRICES AND RENTS

147

finally become impossible and conversion or boarding u p occurs. This does not explain why some lower-quality units experienced such large increases in price or rent, but perhaps is one of the reasons for a fairly low proportion having filtered down. Another possible explanation is that the demand for new construction and higher-priced used homes has not kept pace with rising earnings. As a result, the number of inexpensive but standard used dwellings that have been released by families moving to better neighborhoods may have been slightly less than the increase in lower-income and lower-middle-income families who can now afford these accommodations. This pressure of expanding demand upon a satisfactory supply would find some release through the conversion process and filtering from above, but could still act as a brake on downward price and rent movements. T h e explanation itself finds support in the ease with which tenants are found for low-rent units with adequate facilities. Still another possibility relates to the mechanics of the market process. In the situation of growth that characterized the nation and all metropolitan areas from 1950 to 1956, excesses of supply created in the new-construction value ranges did not result in equivalent excesses for the entire system, but served to accommodate indirectly the added numbers of lower-income families who could not afford new homes. Thus it would be expected that price and rent declines created by surpluses in the upper brackets would gradually be dissipated as the filtering process extended to the furthest reaches of the market. A fourth question: would not the huge volume of single-family home construction since 1950 be expected to generate more price declines in the ownership than in the rental market? A major factor in the 1950-56 experience

148

HOUSING MARKETS AND PUBLIC POLICY

was, as we know, a substantial shift in preferences which sustained values at all levels in the owner-occupancy market, frequently at the expense of the rental, sector. T h e preference may not have been for owner-occupancy itself, but rather for a dwelling unit in more open surroundings, or for more housing per dollar, but these desires found expression only through the purchase of a singlefamily home. In any event, new rental construction probably was less a factor in the market decline of existing rental units than was the expansion of the supply of single-family structures. Why, in the over-all, the proportion of units that shifted down was the same in both the owner-occupied and rental sectors must, however, remain in the realm of conjecture. Finally, what about the effectiveness of rent control? It has been stressed several times that the national pattern of sizable and extensive rent increases was found, with little variation, in each region and metropolitan area which the Bureau of the Census examined. Yet the central cities of several of these areas were under rent control for all or most of the period between 1950 and 1956. Did the large increments reflect legally renegotiated rents subsequent to improvements by the landlords, or extralegal arrangements, or greater than average increases in the suburbs whose controls were terminated at an earlier date? Here again we have, regrettably, no answers. PATTERNS OF PRICE AND RENT

MOVEMENTS—II

The preceding analysis, as already pointed out, focused on only a portion of the 1950 housing inventory. Downward price and rent movements were also experienced among units that were ultimately vacated, con-

M O V E M E N T S O F PRICES AND RENTS

149

verted, merged, abandoned, demolished, or shifted to a different tenure arrangement. In fact, it may be presumed that a large proportion of these changes were either a direct cause or direct consequence of actual or expected declines in value. A more accurate picture of value and rent declines within the 1950 stock must, therefore, include as many of these units as possible. Lack of national data for units that shifted in tenure prevents the inclusion of this section of the inventory in the analysis, but the other units can be subjected to at least a rough scrutiny. For units that were demolished, merged, or converted, or which became vacant between 1950 and 1956, only the 1950 value or rent was known. In order to incorporate these dwellings into the analysis, therefore, an assumption had to be made as to the probable proportion of units that had suffered a market decline prior to the particular change which they experienced. This proved to be highly arbitrary because the type of change gives no clue. Thus, in some cases structures were demolished because of lack of demand, whereas in other instances they gave way to slum clearance, highway development, or another more profitable private use. Similarly, some vacancies reflect normal turnover of families whereas others are a measure of units on the way down because of permanent lack of demand at the old price or rent level. Mergers and conversions represent an even more difficult problem of interpretation. In most cases, a merger probably occurs because of lack of demand for the smaller constituent units. Symmetrically, conversions are occasioned by lack of demand for the larger structures from which they are carved, as well as by increased demand for small units. Thus, a conversion, although it could for some purposes be regarded as upward filtering (more

150

HOUSING MARKETS AND PUBLIC

POLICY

revenue from the same floor area), is more accurately viewed in most instances as a part of the declining life cycle of a structure. And by the same token, a merger, which typically is an improvement in living conditions, also usually reflects potential or actual rent declines among its former component units. Thus, a fairly large percentage of both mergers and conversions probably occurred in the face of declining demand for the units which were subjected to one or the other of these two types of change. With quantitative guide lines completely lacking, price and rent movements among "changed" units were simply assumed as follows. One-half of the units which were removed from the inventory by demolition or other means were presumed to have experienced a prior decline in price or rent (constant dollars). The same was assumed to be true with respect to the combined total of units that were converted or merged. Finally, the same reasoning was applied to vacancies. Here, however, the NHI presents data only for all units standing in 1956. The portion of the 1956 inventory which was standing in 1950 is not treated separately. This does not impose serious difficulties considering the way in which the data are being used. It was evident from an examination of the figures, however, that most of the vacancies in the higher price and rent brackets were in newly constructed units not yet occupied. In these brackets, therefore, it was assumed that only one-quarter had declined in rent or value. Even this percentage may be high. The addition of the above units considerably alters the pattern of value and rent movements that emerged from the calculations in the preceding section. In the owneroccupied portion of the inventory the change is slight

MOVEMENTS O F PRICES AND RENTS

151

(Table 16), but in the rental sector it is quite large (Table 15). T h e proportion of units that filtered down almost doubles, and most of this increase is accounted for by low-rent units. As a consequence, the bulk of the downward movement, both absolutely and relatively, is now concentrated in the rental sector. It must be noted, however, that neither the total estimated incidence of filtering nor its distribution among various value and rent categories is sufficiently different to alter the remarks made earlier concerning the effectiveness of rent control, the questionable view that the older, cheaper homes are greater mortgage risks, and the general reasons behind the pattern of value and rent movements. Three explanatory points regarding the new distributions must be made. First, the estimates are influenced by the arbitrary assumption concerning the proportion of "changed" units that suffered a market decline. Had a figure other than one-half been used or had each value and rent bracket been assigned its own percentage figure, the results would have been different. Even large changes in the assumption, however, would not significantly alter the conclusions which may be drawn from the new distribution. Second, within metropolitan areas the distribution is somewhat different. It does not deviate quite so much from the original estimate in the previous section. This is because vacancies in the urban centers were not, as pointed out earlier, concentrated in the low-rent bracket as they are nationally, but were spread fairly evenly throughout all categories. Third, the new distribution is misleading to the extent that it suggests wider social benefits from rent declines than does the first estimate. T o lower-income families,

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