Rents at newer luxury “Class A” apartment buildings in Seattle are rising at twice the rate of rents at older “Class C” buildings, despite having twice the vacancy rate. Which which is weird because…
The data seem to defy the law of supply and demand. I asked Cain about it; he believes it has something to do with the different types of ownership models at luxury apartment buildings compared with the older ones.
Premium Class A properties are typically owned by institutional investors and managed by a national property-management company.
In contrast, Class C properties are usually owned by people with a connection to Seattle — either a family (though that’s become a lot less common in recent years) or a small group of local investors.
“Also, these owners seem to hold the properties longer,” Cain says, “and as a result, they have lower debt coverage ratios.” The less debt they have to service, the less pressure to push rents to the maximum.
In other words, many of these landlords aren’t jacking up rents to whatever the market will bear. It’s a refreshing change from the all-too-common stories of brutal rent hikes forcing tenants to relocate.
Except, of course, it’s not weird. Because there is no “law” of supply and demand. Supply and demand is a useful construct for describing, in general, how markets tend to work. But it’s not a law. People—and thus the markets they create—are a lot more complicated than any three-word phrase can describe. So no, merely adding more supply is not the only (or even an adequate) solution to Seattle’s growing affordability crisis.
I’m not saying we don’t need to add more housing units. Of course we do. Massively. But the market alone will not solve this crisis because the form of ownership matters.
So, no Keynesian Economics then?
Seems like apples to oranges. The comparison is helpful as a way of illustrating how factors other than supply and demand can significantly affect equilibrium price (although most of the time by affecting either supply or demand). But comparing market dynamics of Class A rentals and Class C rentals is like comparing sales of passenger cars with sales of RVs. Real markets are full of variables. Because… People.
Some people are misled by the fact that economists crunch massive amounts of data, use complicated charts and graphs, and mathematical concepts to explain things. Economics is a social science, not a physical or mathematical science, in that it studies human behavior. Consequently, no “laws” or “rules” of economics are hard-and-fast the way, say, the speed of light is. Nevertheless, economic models aren’t merely faith or voodoo, either. They provide useful generalizations that have some predictive value. In general, a higher market price for a good or service will tend to encourage more supply, etc.
So, Goldy is right insofar as it’s not a “law” in the conventional sense, but it does have real-world applicability. And Jack @1, as usual, has his head up his ass. Keynesian principles, as with all things in economics, are subject to human variability and illogical choices, but they do “work” in the sense that, when applied to a large enough sample size, they will tend to produce a predictable outcome just as the “law of supply and demand” will. This is a pretty broad generalization, subject to many caveats, but when you’re in a recession Keynesian stimulus seems to work a lot better than the austerity dogma that conservatives try to inflict on us.
While these analogies obviously are imperfect, you can somewhat liken the Keynesian and so-called “free market” approaches to a sick economy to a car with a dead battery or a sick hospital patient. The conservative stands around waiting for the battery to recharge itself or the patient to recover without any intervention. The Keynesian jump-starts the battery or performs surgery on the patient. Who would you rather entrust your survival to? The conservative will vote for economic euthanasia every time.
@2 You can pretty well count on temporary low gas prices to stimulate purchases of long-lasting SUVs and gas guzzlers. Because … people.
Expanding on that theme a bit, yesterday Phillip Morris stock was “worth” $78.13 a share. Today, it’s “worth” $84.96 a share. Because … people. So that’s a net change of +$6.83 in one day. Let’s say Roger Rabbit owns 114 shares of Phillip Morris — pretty punk, if you ask me, but whatever — so Roger Rabbit “made” $778.62 today off that one stock without producing a damn thing or even getting out of bed (much less commuting to a job, and putting up with a boss and co-workers). Because … people. I gotta say you humans are hard to figure out. Imagine if all of you were like Roger Rabbit — fat, lazy, useless, unproductive, and all that. It sure is too bad the Roger Rabbits of the world can make 4.3257 times as much money as a $15 an hour worker putting in an 8-hour shift considering they produce absolutely nothing. We call it capitalism and worship it. Beats me why, because if everyone did that we’d have a zero-GDP economy. We ought to worship workers instead and make capitalists take out the garbage. I don’t understand why we don’t, any more than I understand why some people vote Republican. Because … people. That’s all I can think of.
Irrespective of “laws”, what is happening here can be modeled, and thus explained, with supply and demand curves. One just needs to better understand which good(s) are being demanded and supplied.
(Hint: the market for McMansions has little to do with housing))
Keysenian economics boils done to the government spending money, even if it has to borrow the money to spend.
Goldy, your focus on the semantics of the word “law” isn’t going to convince anyone. There are valid critiques of economic theory, but you should focus on the theory, not the wording.
What I think you’re really trying to do is challenge the theology of free markets. The free trade high priests like to talk about supply and demand and other economic principles as commandments from their preferred diety. They emphasize the “laws” that support their interests, and conveniently ignore actual economics, with all its variables and qualifiers and acknowledged limitations, and the actual impact on humans, hidden away in the “efficiencies”. Those theologists deserve your scorn, not the honest economists.
Sigh. Most people don’t understand what mainstream economics is sayng. There are two definitions of “market.” In common parlance, it means “a particular economic sector” such as housing, widgets, cars, finance, whatever. In economic theory, micro, it means a situation in which buyers and sellers have roughly equal information, neither is under any compulsion to sell, and there are no external forces creating a severe imbalance in power. like, you know, slavery, of if you are at death’s door. ergo:
medical care is not a market. you are sick, unable to comparison shop, or just don’t have info to tell you is procedure X better than Y. you can’t even get fucking price information. this market is not a market.
-labor. when a seller of labor is barely able to buy food and rent, um, he’s under compulsion and isn’t freely negotiating. this is not a market. external rules like min wage also mean not a market.
many markets partly fit the definition. so zoning is an external rule making real estate kinda not a market; but the fact that there are like 10,000 contractors and handymen out there makes my search for a new plumber a pretty good market. So I use the one that didn’t rip me off last time, not the ones that tried to rip me off. though still, I don’t have knowledge enough of plumbing.
when the conditions of an economic market apply, the predicted outcome (often called “law” informally) does work pretty good. it’s a good theory.
lefties and progressives often just fail to even note that market theory SUPPORTS OUR POSITION ON HEALTH CARE or hte min wage because, duh, these are not true economic markets therefore need regulation or in the case of health care, nationalization.
now as to rents. building more class A buildings and filling them with high tech workers does something funny. it makes the location of every other building downtown, in SLU or the whole region, better — it’s closer to more pools of high tech workers, more trendy restaurants, more stuff, more people to fuck and date and marry and befriend, more specialized brazilian capoera schools and so on. ergo, CITIES.
thus rents rise and do not fall. widgets to not operate like this, throw 1000 more on the pile of 1000 and the first 1000 are no more in demand. so real estate is not a market due to locational externalitiy impact raising demand for other buildings if you add more buildings. also not a market is class C landlords not maximizing profit, but I actually doubt they’re helped if they have huge turnover/hassles of evicting. I mean throw out one tenant and he or she can claim there was mold, and suddenly your turnover cost goes way up. or, there is a subtle unstated deal between long term tenants at lower rent and the LL: the tenant lets the landlord not fix the broken blinds, not fix the leaky faucet, not replace the aging fridge. if the landlord evicts or terminates the tenancy to get new tenant at higher rent, even one week of minor repairs often means you lose one month’s rent, so it’s often better to let the tenant stay. many of these landlords of smaller buildings are often doing the work, the small jobs, themselves and if they have to give up golf at the public course near their home in shoreline wherever, that’s a cost, too. they want to minimize their own time, their own labor cost, which is often not even on the books. so i would not jump to the conclusion they are not acting “rationally” or not maxing their profit.
in other areas, where a market isn’t a market because of fraud, scams and monopolies, say for example the TAXI industry, progressives should welcome putting more market into it (always, with appropriate regulation) (for health, safety etc.) by lifting caps on providers which truly do suppress quality, supply and product differentiation. in sum, markets do work pretty well but are a limited theory, and even mainstream economics do NOT say micro theory applies to macro but even Dems have totally forgotten the massive achievement of keynes and macro with obama barely able to even express this theory that higher pay means higher purchases or higher govt. spending means higher purchases and profits and big govt. leads to big growth benefitting all. condemning economic theory in general is a poor tactic, goldy, because you also then implicitly condemn the macroeconomic theory of the stimulus which is also a pretty good theory, e.g., we had awesome growth 1988 to oh about 1981 and reagan. (clinton interlude also shows growth). why diss the general body of social science that helps us make our progressive case?
Roger@5, your scenario for making a 9% return in a day of investing is misleading. Yes, it’s possible to do that, just as it’s possible to lose 9%. And no one can predict which days will be +9% and which will be -9%. On average an investor makes about 0.02% per day.
You really don’t understand why we pay for capital? Anyone — you, a minimum wage worker, anyone — is welcome to do a job that doesn’t require capital. Or use your own capital. But most people can earn more money by working with other people’s capital, which means they need to get that capital from somewhere, which means they need to pay something for that capital. So the person providing the capital gets a share of the now-increased earnings. I realize it doesn’t look this clean in the real world — no one goes to an investor, says “I want to flip burgers so please build me a McDonald’s store so I can be more productive, and I will share the profits with you” — but that’s essentially what’s happening.
Of course the workers are essential. Contrary to what you wrote, if everyone just invested and we had a zero-GDP economy, those investments would be worthless and no one would invest. So the economy reaches a state of equilibrium. Now many things affect that equilibrium, including minimum wages (I support the $15 minimum, by the way), tax laws, and other economic and political policy. But it makes no sense to totally dismiss the value of capital to most workers.
@10 “Of course the workers are essential.”
Of course the workers are essential. That’s why they’re routinely subjected to badmouthing, mistreatment, and unfavorable taxation. On the other hand, we despise capitalists so much we force them to live tax-free lives of sloth and luxury, we shower taxpayer handouts on them, and we refuse to jail them for their crimes.
@9, your post is interesting and you say a lot of rational stuff but PLEASE use periods, paragraphs, and caps at the beginning of sentences.
@10 Your error is in assuming that the economy is a closed equilibrium system, when it is in fact the opposite. The economy never reaches a state of equilibrium.
Of course capital is necessary. But the market tends to create a natural imbalance of power between capital and labor that advantages the former for a number of obvious reasons, not the least of which being that capital is merely struggling to maximize returns while labor is struggling to survive, and thus capital is almost always better situated to outlast any labor dispute. This imbalance may enrich individual employers, but in the long run it disrupts the market by impoverishing consumers, thus suppressing demand.
The role of government must be to moderate the natural imbalances and excesses of market economies, because that’s how markets function best.
@12 I’ll do that more, when I am being paid to write……these are just blog comments after all.
@13. good examples of use of the word market in common parlance to mean any sector of the economy. The (see that, @12?) imbalance of power in the labor “market” (common parlance) means that by definition it is not a “market” (economic defintion, which includes seller of labor not being in distress or under compulsion). Thus, traditional micro economic theory which goldy oops Goldy criticizes actually supports a regulation in the form of a minimum wage. Traditional economic theory says that if there is the power imbalance caused by the employer being okay on mortgage payment and debts this month, then if the worker is way behind and can’t take 4 days to shop for another job the worker being under distress will take a wage LOWER than the true value. Ergo, we need a minimum wage to ensure employers don’t cheat, steal, seize or whatever you want to call it, the true value of the work done.
in other words “free market theory” provides a solid, reasoned, theoretical, logical foundation for the minimum wage: it predicts there will be exploitation without one.
for the left also I’d say this: it’s not really a great approach to adopt and spread confusions that favor the right; we should be the more logical, scientific, reasonable folks fighting superstition. right now the right wing benefits from fostering the superstitution tha ttraditional economic theory says ever market is a market, when they’re not.
health care, not.
finance, not (could never pay for the externalized cost of “wrecking the world economy when they fuck up”)
labor, not.
internet service, not.
MS, not not when it was tying the browser.
housing plus parking space, not a market, government requires developer to build the parking space.
many sectors are somewhat, but not totally, market.
@14 We’re not interested in playing semantic games, we’re interested in how things work, and how to fix systemic dysfunction. Also, your concept of economics is backwards; because economics studies human behavior, economic theories are observational and descriptive, not driving forces as the laws of physics are.
Goldy, I normally love your stuff, but this gave me flashbacks to the horrors of the 2 years I taught college economics.
This piece really mirrors the flawed reasoning my D students loved to espouse.
There are many valid reasons to criticize (and defend) classical economic theory, but you’re going to need a better grasp of the basics to intelligently do either.
Still light-years beyond that shite Mudede tends to write though.
@16 Maybe the economics you were teaching was wrong? I highly recommend Eric Beinhocker’s The Origin of Wealth.
Well, there’s a variety of reasons I quit teaching economics. Primarily I find it hard to put much stock in a field so heavily reliant on human rationality. Secondarily, I wasn’t going to go too far in Econ as a pro-labor Labor Economist.
The “law of supply” being misapplied here just boils down to “all else equal higher prices yield higher quantities supplied.” Class A vs Class C are two different markets and “all else equal” fails to hold invalidating direct comparative analysis. If we are looking for a principles of Micro explanation Say’s Law, “Supply creates it’s own demand,” is a closer, albeit still flawed, invokation.
A more accurate analysis requires examination of risk and rate of return on each class of housing.
I guess I concur with the piece but was frustrated with the misapplied terminology.
I have read and enjoyed the book you recommended as well.
@18 Speaking of Say’s Law, let’s not overlook that scarcity also creates its own demand. Yesterday someone paid $137,000 for a costume dress worn in “Gone With The Wind.” No one would want such articles if there was an unlimited supply of them. The human snob factor is not to be underestimated (“I have a Porsche and you don’t, neener neener!”).