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March 14, 2012

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"New units in NYC have really expensive “finishes,” whereas that cheap house in the Midwest probably has wall-to-wall carpeting and GE appliances."

Among Manhattan hi-rises, yes, but that's certainly not the case with the cheaply built condominiums popping up in the outer boroughs. They are so cheaply built that most don't have central air (UNHEARD OF in almost all new construction) and instead have sleeves for room air conditions. They are known as "Fedders Specials" after the name of the air conditioner company prominently displayed on the sleeves. And it goes without saying that the cabinets and appliances are what are euphemistically marketed as "builder grade."

The biggest problem is that there are too many people in the USA and this is only exasperated by immigration. Immigration should end.

It is not too late to give douchbag Yglesias a 1-star review on amazon to join the 275+ that are already there.

"(5) In many cases, condo developers are required to build 20% “affordable” units, which are money-losing units, so the developer needs to charge more for the market-rate units in order to break even. "

You really need to take an intro micro course.

[HS: You really need to explain why you think the statement is wrong instead of just throwing out insults.]

Who is this Matthew Yglesias and what did he say or do that got him that name negative reviews?

My short brush around online seems to be he wants to argue for density. Are people really hating that idea so much? Or is there something that Wikipedia didn't about him? Or something in the book?

Yglesias thinks NAMs will flock to density and salve gentrifiers' guilt, but compare San Antonio and Austin.

San Antonio's MSA has a population of 2.2M compared to Austin's 1.8M, yet Austin has far more high-rise condos.

NAMs (San Antonio) want to form families and put them in single-family houses. They don't care about taking the Hipster Trainnotabus to Techjob, just a Shortwalk from Wificoffeebar.

"HS: You really need to explain why you think the statement is wrong instead of just throwing out insults."

Sunk costs don't effect pricing decisions.

If you've got a unit to sell in a building you simply sell it for the most you can get for it. You don't raise the price of a unit because you were forced to give a different unit away to someone with political pull.

[HALF SIGMA RESPONDS: Well first of all, sunk costs DO affect prices. Because not everyone thinks in a manner that economics professors consider to be "rational." The bias of aversion to losses is well documented. The observed behavior is that developers in NYC have chosen to rent out their condos rather than sell them at below break-even. Some of this behavior even makes sense, because once you sell one unit at a loss, that ruins your bargaining power with respect to all of the other units you're trying to sell.

However, if you were actually reading the post, you'd see I was answering the question of "What causes condos in New York City to be so expensive to build?" And it's certainly a factual statement that a regulation that requires you to build one unit you have to sell at a big loss for every four other units is going to increase the break-even price of the other four units.

The true economics of building condos is more like the oil market than the traditional model they teach you in Econ 101 of a factory manufacturing widgets. If people are only willing to pay $1000/square foot, and the cost of a project would be $1100/square foot, then no rational profit-seeking developer is going to build it. If the price people are willing to pay increases to $1500/square foot, then two things happen: (1) developers who started a project assuming $1000/square foot make a windfall profit; (2) a lot of new projects get started because projects that were not profitable at $1000/square foot becomes profitable at $1500/square foot.

It's the same way with oil. Oil that was not profitable to extract at $30/barrel becomes profitable at $90/barrel. The shale oil in North Dakota is this type of high-cost oil that is now being produced because of the higher oil prices.]

Lol! I am one of your regular readers, living in Maricopa, AZ. My reason for being here? 360 days of sunshine, and 70 degrees clear skies on New Years Day.

Dreamer, he had some especially nasty things to say about Breitbart right after his death.

He's a decent idea guy, but doesn't always do the research and hasn't figured out that deep down he's quite libertarian, so he hangs out with the progressives but spends most of his time talking about deregulation.

The problem is that allow everything to be decided by money. Having really high housings costs is a fairly effective but incredibly crude way to ensure you have desirable neighbors. But why not have some type of souped up co-op board where people can democratically select their neighbors and kick out trouble makers?

Its a win for the deserving poor, rich people whose job makes them miserable, and anyone with rich asshole neighbors.

"One factor that significantly raises the cost of housing is the existence of a lot of rich people."

If this is true, this is a problem of only uber-urban places like NYC. Where I live in a mid-sized city in North Texas, there is no such impact. The city is mostly wall to wall middle class. There is some limited upper middle class housing, and some working class housing, but there really is no rich area. I think this situation is typical of where over 90% of Americans live.

Here you go:

http://www.manhattan-institute.org/html/rdr_04.htm

Major cost elements for construction of an office or residential building are:

Land

Hard Costs, which encompass labor and materials for site preparation, foundation, superstructure and walls, electrical, plumbing, interior finishes, and HVAC, together with “general conditions.” Contingency allocations and other fees may account for one-third of total hard costs. Material costs usually account for 40 percent of hard costs in a market-rate residential building, assuming it is using union labor. These prices escalated sharply between 2004 and 2006.

Soft Costs consist of financing, insurance, professional fees for architects, lawyers, and consultants, who must deal with the multiple permits required, as well as compliance with building codes and environmental regulations. These costs typically add 20 to 25 percent to hard costs and can be particularly onerous for developers of affordable housing.

Developers’ Fees/Profits vary according to whether the developer is commercial or nonprofit but are reported to be in the vicinity of 25 percent.

According to the Producer Price Index (PPI) series of the U.S. Bureau of Labor Statistics (BLS), the cost of basic materials used in building construction soared between 2003 and 2006, and particularly in the years 2004 and 2005.

During the course of this study, industry leaders repeatedly cited the shortage in skilled contractors, sub-contractors, specialty trades, and first-line supervisory managers as a major concern.

Until 2006, labor costs were not a major force in driving up building costs in New York City... the limited capacity among contractors and builders is now widely seen as the driving force behind the recent large cost increases.

Given current development pressures, land costs have risen sharply in all five boroughs of the city.

Almost without exception,[2] developers and contractors interviewed for this study cited the morass of regulations and requirements for permits as causing expensive and unnecessary costs and delays. Highly specialized legal and architectural professionals are required to penetrate this regulatory maze. Overlapping jurisdictions between city agencies can cause extensive delays. Applications for special permits or for zoning variances can take months or years, as can environmental studies and other reviews. And delays in obtaining one set of permits can cause others to lapse and force the application process to be repeated.

It was a number of years ago I read this, things might have changed, but the cost of concrete per yard is twice as high in New York as it is in Los Angeles or Chicago.

Half Sigma, Steve makes a very good point about high real estate prices keeping violent and dysfunctional people out of your neighborhood. And steve's argument holds well when it comes to Steve's own hood of Studio City, or Lincoln Park in Chicago

But I don't think it is as relevant to Manhattan.

Steve, as a resident of Studio City may be pretty happy in some ways to keep condo prices at that level, it keeps most violent types from living in Steve's neighborhood.

However, The average condo in Manhattan South of 96th street now costs around $1100 a square foot.

Heck, you don't need prices of $1100 a square foot in order to keep out the violent and dysfunctional people,

In my humble opinion, zoning could be eliminated in Manhattan South of 96th, new high rises could rise from the Hudson to the East river, and average condo prices in Manhattan would drop to $750 a square foot, and the population of violent and dysfunctional people would not go up a lot.

Half Sigma, Anyone who has ever gone walking around the Javitz center will see block after block of empty land or marginally used things like UPS and Fedex truck storage, auto repair shops, and etc.

All in all, there are perhaps 700 thousand people living in Manhattan south of 96th street today and with a complete elimination of zoning you could get that up easily to 1.3 million people. What i mean is basically remove height limits on buildings and remove setback rules. Allow all property owners to build all the way out to the sidewalk as high as they want. Essentially make all of manhattan South of 96th look like Hong Kong - That would dramatically cut the cost of condos down to 750 bucks a square foot, without causing crime and dysfunction.

Half, there are plenty of rich people who want to move to manhattan. But if you DOUBLED the residential square footage in Manhattan, prices would in my humble opinion fall below 750 a square foot and you and other people in manhattan could afford a bigger place for less money

Anyone agree w me ?

And couldn't the same thing be done in the Back Bay of Boston in order to make that a hell of a lot more affordable?

And I don't know DC at all, but I assume that the really cool parts of DC could see housing prices per sq foot cut in half with my plan

Might now be able to do what I suggest on the West Coast, however due to earthquake risk.

Anyway, I am not stupid. I know that neighborhoods packed with wall to wall 70 story condo buildings are going to be architecturally boring, but other than that, why the heck not implement my plan

"The observed behavior is that developers in NYC have chosen to rent out their condos rather than sell them at below break-even."

You get a value for renting an apartment - the present value of the stream of rents plus the option sell the unit in the future. If that value is greater than the current sale price, you rent the unit. If it's not, you sell - regardless of what you paid to put the unit up. The sunk costs of having built political payoff units has nothing to do with that.

A whole separate issue is undermining your bargaining position by selling a unit cheaply. This might be relevant if there weren't thousands of other apartments with the same general characteristics. Holding a unit off the market isn't going to have any noticeable effect on prices.

All of this is beside the point though. I skimmed the original post and replied too quickly. You're right - one of the factors that can cause a developer to lose money on a project when the units that sell for $500,000 are the kickbacks in the form of "affordable" units.

[HS: There are thousands of units, but the condo market is oligopolistic with a relatively small number of big developers who don't want to start a mutually destructive downward price-war with each other.

The individual owners who are trying to sell shouldn't care about that, but individual owners will behave less rationally than big corporations and will be strongly averse to selling at a "loss" and will hang on to their unit waiting for the market to recover.]

Manhattan housing isn't expensive because of production costs. Manhattan housing is expensive because living in Manhattan is a positional good, and lots of people are competing to live there, thus driving up prices.

As someone with a economics PhD I sometimes criticize Half Sigma, but he is 100% right here. Sunk costs matter ex-ante. If you anticipate having to get into a sunk-cost problem, you will demand higher return to enter the market.

You don't need any behavioral economics for this result though, just a model with more than one period.

The Steve Sailer link is wrong.

[HS: And so it was.]

HS, no doubt you saw this in the NYTimes real estate section two weeks ago:

http://www.nytimes.com/2012/03/04/realestate/how-many-people-can-manhattan-hold.html?_r=1&scp=2&sq=how%20many%20in%20manhattan&st=cse

Obviously, the answer is simply "supply and demand", as Dan notes above--and it isn't any more complicated than that. You yourself said recently that years ago Manhattan was full of working class people and wasn't the glamour destination it is today.

I remember a quote about similar costs at the other end of the country: "As long as people prefer an apartment in San Francisco to a mansion in Ft. Wayne, Indiana, such price disparities will continue."

Cities such as San Francisco, New York, London, Paris, etc are just too well known internationally and provide dynamic urban living environments that are scarcely available around the world. You have to either accept getting poor value for your abode or move out. I don't think much can be done to make such cities more affordable to most people. I think one factor for high rents is rent control, which keeps rents really low for long-time residents while causing rents for newly available units to skyrocket in order compensate for the loss of rental income caused the parasites with cheap rents.

Simplest explanation is any city that is "filled in" and still has a functioning economy will have expensive real estate. Sure regulation may play a part, but I'm guess it may add an additional 15% tops. Racial tension and resulting mis-allocation of resources probably adds another 30% to the "real" cost of housing.

"But why not have some type of souped up co-op board where people can democratically select their neighbors and kick out trouble makers?"

Disparate impact. They'd immediately notice that black people get kicked out of desirable, low-crime co-ops at higher rates than whites. Then they'd get sued for housing discrimination, co-op boards would effectively be neutered as far as dealing with troublemaking NAMs went, and we'd eventually go back to the "pricing out undesirable neighbors" model.

Duncan Idaho - studies have shown that zoning restrictions can *double* the price of housing.

Another advantage of using high prices to keep out the riff-raff is that you get a few wealthy (well-behaved) NAMs into your neighborhood/condo building, and get to pat yourself on the back for being "diverse". (And keep the FHA lawyers off your back.)

Georgia Resident: I definitely think that the left is partly responsible and that we'd have to get rid of disparate impact and even some of disparate treatment (because group differences are relevant and logical when dealing with incomplete information). But theres also definitely a strain of thinking on the right that says that money is the one true and right way to determine everything (and that wants people slaving away to buy things that in a better society would not be bought)

Half sigma, to further your thinking on property prices, you've got to remember 2 important things :

1) that transactions represents less than 3-5% of volume .... out of wich only 1 or 2% is new constructions. So, it's easy to see that even if you double the offer, you won't halve the price !

2) the value of the property only depends on the wealth (revenue and capital) of the newest inhabitants, not on infrastructure. That's why in city, it's the land who is expensive. So if there is a decrease in demand, the inhabitants just don't sell wich prevents the price to fall too much if there rich people ....

To know if you're rent is too expensive, it's really simple, you compare your rent and the rate interest you would pay if you borrowed to buy the house (you neutralize the other charges specific to renter, owner and both).

If you rent is inferior, you're making a good deal, if it's more thant 50% more, you should think borrowing the money (you can never know how financial markets and house markets will go, so it's better to forgert about it in the arbitrage).

How do you feel about the tensions between Hasidim and hipster newcomers in Williamsburg? And do you think Brownsville will eventually be gentrified? As Brooklyn becomes more expensive, people will eventually expand outward.

Near Boston, Cambridge is going through it, and certain "suburbs" around it are currently going through the renewal process.

While everything you listed is a valid reason for prices to go up keep in mind just how high in demand Manhattan is, where even the Meatpacking district has high rent. And what about people such as Gloria Vanderbilt being turned away from certain Upper East Side coops? If an elite such as her gets turned away, then hardly anyone would have a chance to appease those sociopathic co-op boards.

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