Shortages and Spillovers: How People Misunderstand the Housing Crisis
Housing Shortages Are Housing Spillovers
“Do we have a housing shortage?”
What seems like a simple question is actually a deceptively difficult one. There is no clear, empirical definition of “shortage” — how do we know when we have or have not built enough? How many homes is enough?
It’s clear that the answer cannot simply be “a home for everyone who needs a home.” Imagine the consequences if there were exactly one home per household — no more and no less. What happens when someone wants to move to a new neighborhood or city? What happens when a grown child wants to move out of their parents’ house or a couple splits up?
No, a functioning housing market requires slack. This slack takes the form of a certain level of vacancy, so people can move. This mirrors the job market, where it’s healthy to have some modest level of unemployment at any given time so that job seekers — including those employed but looking to change jobs — can find ample options.
I’ve written before about the importance of vacancy in moderating home prices and rents. When there are many vacant (and available) homes meeting a given set of criteria, prospective residents have options — and sellers must compete on price and amenities to attract buyers. Empirical data drawn from many different regions clearly shows that, on a metropolitan scale, rents tend to rise when vacancy rates are low and stabilize when vacancy rates are high.
We can think of vacancy as the capacity to absorb demand. And, of course, the ability to quickly create new homes in a place — to create new vacancies — contributes to this absorption capacity. The real estate industry uses the word “absorption” in a technical, mathematical way, but let me use it here instead to sketch out an ecological metaphor. (I like comparing complex things like the housing market to a natural system, as we tend to think of ecological systems as complex and dynamic, as opposed to man-made systems, which we expect to obey static and linear rules.)
Imagine a wetland, which has the ability to take in and store vast amounts of rainwater. In our metaphor, the rain represents demand for housing, which can become a localized downpour for many reasons (for example, if a large company opens a new factory or offices in a city).
When the ground is saturated and water can no longer be absorbed locally, it spills over. A wetland system typically distributes that water slowly through thousands of tiny channels. Such a system is remarkably capable of absorbing a large influx of water without suffering damage.
When artificial barriers are constructed, however, the result is typically flooding. This happens when the surface of the land is paved over (and thus cannot absorb water), or when various dams or channelization schemes are put into place. The water is concentrated instead of distributed, and it eventually grows into a destructive flood.
The housing market is rife with artificial barriers. Do you see where I’m going here?
The biggest barrier of all, of course, is that the majority of neighborhoods are not allowed to add any housing at all. It’s likely, if you live in North America, that somewhere between 70% and 90% of your city’s residential land is zoned for single-family homes and is at its zoned capacity. No appreciable net growth can legally occur in these places (beyond slight adjustments in household sizes), no matter how popular or in-demand they are. The only absorption capacity results from people who choose to move away, leaving a vacancy behind.
When we cannot absorb housing demand locally, that demand spills over. This metaphor is particularly appropriate for housing, as housing demand is unusually fixed. It’s not like other products — say, steak, fresh fruit or live music — where we can easily adjust our consumption in response to the price or availability. For the most part, everyone needs exactly one home. Not two, and certainly not zero. So, when housing demand can’t be met in a given place, it doesn’t evaporate. It spills over. It goes somewhere.
Sure, if we are priced out of a given neighborhood, we might compensate by consuming less housing (renting or owning a smaller home with less square footage and/or less desirable features). But we are more likely to compensate by looking elsewhere, in a place where housing meets our price point.
A lot of deeply erroneous thinking about housing arises when we fail to recognize spillovers. Perhaps first and foremost, we mistake the present consumption patterns of people seeking homes for the actual demand. We assume that how and where people live now represents some sort of pure revealed preference. Relatedly, we assume that the existing character of a place — the number of people that live there and the nature, type, and size of the buildings that exist there — is somehow an intrinsic quality of that place; its default, authentic state.
In reality, what we’re seeing is the result of constrained choices and compromises made within a system of prices. Housing options or neighborhood types that are immensely desirable but rarely legal to build become expensive on account of their scarcity. And in places where we don’t allow building, the population won’t grow. It will grow somewhere else instead.
It’s as if we assessed the climate of a place purely by looking at how much water was on the ground. In the real world, we can easily understand that the water we see comes from rain that fell somewhere else — think of the Nile flowing through Cairo. Can we similarly understand that the housing patterns we see often represent demand displaced from somewhere else, or to somewhere else?
The Importance of Letting Every Neighborhood Grow
A fascinating exchange on Twitter/X illustrates this status quo bias in action: Two users trade photos of Santa Monica, California, back and forth, each trying to argue that their photo selection represents the city. Is Santa Monica “a major regional job center with a direct rail link to downtown Los Angeles”? Or is it a quiet coastal town “which closely resembles the life of Alicia Silverstone in Clueless”?
More importantly, which of these characterizations (both of which are clearly true to some extent) is Santa Monica’s true destiny? Which of these represents how we should think of Santa Monica?
Here, we’ve crossed into the territory of irreconcilable value judgment. There is no objective answer to what Santa Monica “should” look like, how tall its buildings should be, how dense its population should be or how many people should live within its borders. No central planning formula can determine this — least of all in a way that will mollify the homeowners who bought houses with verdant laws in a quiet beach town (or thought they did) and quite liked it that way, thank you very much.
I’m not saying that all moral arguments here are equally compelling or forceful, mind you. To lay my own cards on the table, I think the obvious benefits of building up Santa Monica — allowing far more people to live in a place with a stunning natural setting, year-round 70-degree weather, and robust transportation links within a huge, globally important metropolis — far outweigh the desire of existing Santa Monica homeowners to preserve a certain low-density, verdant character. And I would be glad to engage in politics to see my side of that moral argument prevail. But understand that it’s ultimately a moral and political argument, not an empirical question of the ideal population or the exact level of housing demand in Santa Monica.
But spillovers are an empirical fact. They’re hard to measure, but we know they happen — I don’t think anyone is going to seriously argue that there aren’t a lot of people who'd choose to live in Santa Monica if homes existed to accommodate them — and we can recognize that they have consequences. At what scale should we seek to mitigate these consequences?
At Strong Towns broadly — and in "Escaping the Housing Trap," my book with Strong Towns founder Charles Marohn — we have generally argued that the neighborhood is the proper scale here. In other words, every neighborhood needs the ability to flex and grow. To add housing units at some appreciably nonzero rate, in response to demand.
This doesn’t have to mean, “Tear the roof off the sucker.” In fact, the whole point of broadly allowing growth is that you recreate more of a “wetland” condition in the housing market: Demand can be absorbed locally across many locations, instead of running off and flooding a few locations. A larger Santa Monica (and Hollywood, Culver City, Venice, Los Angeles, etc.) likely means a smaller Victorville — a place two mountain ranges removed from Los Angeles that exists only to capture Southern California’s spillover demand for comparatively affordable housing, not because 140,000 people were dying to live in a beige tract house in the Mojave Desert.
(If you live in a place like Victorville and that’s your jam, my apologies. I just don’t think that it having a significantly larger population than Santa Monica is indicative of people's preferences.)
When places have extremely high demand that cannot legally be met, the spillover results in a lot of Victorvilles — exurbs carved up for housing development that are far from nearly everything. They also often result in urban neighborhoods being flooded with cataclysmic money. These places undergo rapid, disorienting transformation — involving the loss of existing community and social capital — because their residents don't have the political clout to erect and enforce strict restrictions on new building projects (unlike Santa Monica).
The neighborhood scale is crucial for understanding these kinds of consequences. The neighborhood is where we form the kinds of community that are dependent on physical proximity. It’s usually where our children are educated. It’s where we look for recreation and casual connection. It’s the place that most shapes our day-to-day experience and ability to meet basic needs. When we don’t let neighborhoods accommodate change and flows of people, the spillovers are harmful in obvious ways, even if we are building lots of homes somewhere else in our city or metro region.
Aggregating data from lots of individual places is useful for illustrating the scale of the macro problem — for instance, “California needs 180,000 units per year” and “National housing underproduction increased last year to 3.9 million missing homes” — but I’m not a big believer in trying to solve the problem at this level, as if a whole state or country was a game board and the goal was to place “units” somewhere on that board.
People’s lives are local, and a healthy housing market will be responsive locally. There needs to be some feedback mechanism in every neighborhood that translates “people demonstrably want to live here” into “someone creates homes for them here.”
This won’t mean that everybody gets a home exactly where they would most like to live. It won’t mean a place like Santa Monica, Miami Beach or downtown Vancouver ceases to be expensive.
In fact — and this is a point that is, in my opinion, underappreciated by the pro-housing side — building a bunch of housing in Santa Monica would probably not lower rents in Santa Monica. It would bring more people to Santa Monica, creating lower rents elsewhere in Greater Los Angeles as the spillovers from Santa Monica lessened.
But that’s a net win on two fronts, as well as an important step toward healing the system. And healing the system is ultimately going to get us more of the homes we need where we need them, allowing more of us to live good lives in places that serve us well.
Daniel Herriges has been a regular contributor to Strong Towns since 2015 and is a founding member of the Strong Towns movement. He is the co-author of Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis, with Charles Marohn. Daniel now works as the Policy Director at the Parking Reform Network, an organization which seeks to accelerate the reform of harmful parking policies by educating the public about these policies and serving as a connecting hub for advocates and policy makers. Daniel’s work reflects a lifelong fascination with cities and how they work. When he’s not perusing maps (for work or pleasure), he can be found exploring out-of-the-way neighborhoods on foot or bicycle. Daniel has lived in Northern California and Southwest Florida, and he now resides back in his hometown of St. Paul, Minnesota, along with his wife and two children. Daniel has a Masters in Urban and Regional Planning from the University of Minnesota.