Not all pessimistic theories can be true

Are coastal real estate markets far too expensive for new home buyers? One pessimistic theory is that the very few Americans can afford to buy houses in the expensive coastal markets. In this view, we need to produce housing at much lower price points in order to make it "affordable".

Another question is whether building more housing will reduce prices. One pessimistic theory suggests that just building lots more housing in expensive coastal markets won't solve the problem of high prices. For example, this is from an excellent article discussing NIMBYism and YIMBYism:

One big problem with SB 50, Nall believes, is that its beneficiaries aren’t clear, other than the real estate developers who back it, and, perhaps, the young white-collar renters who might easily afford to move to Austin instead. Housing isn’t a pure supply-and-demand problem; location is a huge factor. Some say that the amount of demand to live in the Bay is literally insatiable, and that costs will never come down naturally. And the jury is out on whether “trickle-down housing”—also known as filtering—brings down rents. You could fill a basketball court with the economists and policy wonks who are arguing about this right now.

Each of the two pessimistic theories that I described are entirely plausible. Students of EC101 will recognize that both are essentially "elasticity" questions. However, these two pessimistic theories cannot both be true. One assumes demand is relatively elastic and the other assumes demand is relatively inelastic. Either building lots of new housing brings prices down sharply, or lots of Americans can afford to buy really expensive homes in coastal regions.

In fact, both pessimistic theories are addressing relatively uninteresting issues. The interesting issue is this:

If we build lots more housing in the Bay Area, will lots more people be able to afford to live in the Bay Area?

Unlike with the two pessimistic theories above, the answer to this question is unambiguous: Yes!

And this statement is true regardless of the elasticity of demand for housing.

PS. I wrote this post a few weeks ago, and was prompted to post it now because I came across these interesting tweets, on a related point:

The post Not all pessimistic theories can be true appeared first on Econlib.

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