Subscribing to the “Housing Theory of Everything” is to confront the fact that a problem can 1) be important, 2) effect (nearly) everyone, 3) have an obvious and welfare improving policy solution, and 4) still be politically stuck. Whether it’s classic prisoner’s dilemmas or a more subtle transitional gains traps, the reality is that building housing has proven incredibly difficult because there is a group whose wealth is overly concentrated in the stock of housing they own (i.e. nearly every homeowner in the US) and who have every incentive to fight to prevent new housing from being built because restricting housing supply increase the value of their propterty.

That’s it. That’s the whole story, everything else is bookkeeping and tactical anecdotes. So how do we solve this problem? One way is to motivate large swaths of voters to push for reform, but there’s only the entire body of political theory and history telling you that’s easier said than done when the opposition is concentrated and organized.

The thing is, building more housing is the “first best” solution- it’s not the only solution. Should we increase the housing stock, lower prices, make the average person wealthier and more economically secure, reduce homelessness, and spend all of eternity celebrating the victory of common sense in the halls of Valhalla? Yes, of course. But that “first best” solution isn’t available in a lot of places (see the previous two paragraphs). Besides beating our heads against the wall in the hopes of victory one spoonful of brick at a time, what else can we do? We can go looking for second-best solutions, particularly ones where the political opposition is softer and less organized.

Converting office space to residential housing is a near Platonic-ideal second best solution. Why? Because it produces more housing, albeit with the costs of conversion and likely subperfect design. What makes it a dream second-best solution for our dilemma, however, is all of the opposition mechanisms it dodges:

1. There’s nothing remotely historic about most of these buildings.
2. The are structured in such a way that lend themselve to high-density housing (i.e. apartment and condo towers).
3. They’re predominantly in relatively dense urban and edge-city areas.
4. Whatever views or skylines they are obstructing are already obstructed!
5. There’s a built in interest group to push for the conversion (i.e. the building owners).
6. There’s no pre-existing tenant or tenants who’s losses can be highlighted at the expense of everyone else’s gain.

First and second best categorization are always a little squishy because they depend on what you include in the costs and benefits. Building new housing from scratch might seem obviously the best possible outcome, but once you factor in the political costs of zoning and approval, there’s going to be a lot of locales where building conversion is the far lower cost option. I’m very much team “work from home” and this is just one more reason you should join our merry band of robe and slipper-types. Hollow out the offices, convert the buildings to housing, and watch the urban landscape transform from gray and glass offices to a utopia of urban singles skipping from brunch to brunch until their kids are born and their metabolisms slows down.

Now, to be clear, there is no political free lunch here. There will still be costly and difficult re-zoning obstacles in lots of places. Plenty of these building will need to be brought up to code. The locations may not be ideal relative to schools. But those costs and concerns are trifles when considered in the context that the median income in half of US cities is insufficient to rent a two bedroom apartment for less than 30% of gross income.

Democracy is messy and there’s no changing that. While it makes for bad sloganeering and will never insulate you from getting slagged on twitter, the reality is that second best solutions are what move peaceful societies forward. We have a lot of coalitions to keep happy, they all want something for themselves, and nothing is free. We have to work with what we got.

And what we got is a bunch of office buildings that nobody wants to work in anymore. Let’s live in them!

…and then work from home in them? In what used to be the offices we didn’t want to work in?

Yes.

I can’t shake the idea that captured land value serves as the origin, or at least accelerant, of a great deal of the problems in the United States. What if the YIMBY vs NIMBY fight is just the most visable element of the core economic disease in America? A heads up, if you’re expected a deeply researched 5,000 word post that will YIMBY “pill” your most skeptical colleague, make your peace with disappointment now. But if you’re into policy failures and run-on sentences, you’re in for a good time.

I just can’t get over how often the examination of seemingly every subpar economic context (not immediately attributable to a pandemic or war) comes down to people X are geographically constrained, they need to be proximate to a specific physical location to produce or consume Y, and a huge amount of the economic surplus that would be created from any sort of exchange is captured by land/property owners because legal constraints on development have made the physical place in which an exchange happens THE short side of nearly every market that is pointed to as a failing institution.

Seriously, go through the list of everything that leaves critics of markets ready to burn capitalism (and its fostering society) to the ground. Wages are too low relative to rent. Rent is too high in the places that are near the jobs I want. Public schools aren’t good enough unless you’re willing to carry a mortage that would account for 70% of your take-home pay. Healthcare…eh, maybe not healthcare. Healthcare is crappy for its own bespoke and byzantine set of reasons.

I am a person with no shortage of bodily ailments because I chose to play lots of sports despite never being especially good at them. As a result, I am an avid consumer of physical therapy and therapeutic massage. I have had many conversations about the economics of these fields, and I am now 100% certain that the key to making a career at either, given a minimal level of competence, is not how good you are at your job, but your capacity and good fortune in solving your real estate problem. The entire Massage Envy empire appears to exist not based on greater competence in technique, training, or personnel. It exists solely to extract rents from employees because scale lets them solve the real estate problem (and probably pool liability risk, too). The single biggest thing an individual professional can do to increase their yearly income is not win an award for Therapist of the Year or get 5 stars on Yelp. It’s buying a house with a room they can use as a home office, where they can pay “rent” to themselves and take a tax deduction for the office.

I was once told a likely apocryphal story (that I can’t find on the internet, so it’s probably not true) that the then CEO of Starbucks declared “We make coffee, but we’re in the real estate business.” That their business had matured to the point where revenues could be projected with sufficient accuracy that the profitability had been reduced to identifying opportunities in the real estate market. I don’t know if that ever happened, but that still seems about right to me.

Housing costs hold a special place in how we view our own economic status and security going forward, in part because food costs have been reliably low for so long (knocks on all of the wood). When the rent goes up we feel worse off, not just because we have less disposable income today, but because it increases our expectations for future rent increases as well. We have lots of words for economic insecurity and desperation, but nothing quite makes your blood run cold like the prospect of being homeless, even for the briefest moment.

The phrase “paying your nut” is a lot less common these days. You usually only hear it from self-employed people who live off of a la carte incomes, either in entertainment, freelance, or contracting work. It refers to the minimum amount you have to earn in a month to avoid significant consequences, usually the aggregate of rent/mortgage, utilities, and debt payments. Economists talk about “nominal” and “real” incomes to account for the changes in prices people face. Sometimes there is discussion of “money illusion” where people living under inflation are fooled by higher take-home pay into thinking they’ve become richer. I’ve never been persuaded that nearly anyone suffers from money illusion, nor do I think folks track national price indices and growth statistics.

I think people just know whether it’s easier or harder to pay their nut, and the simplest version of that is the ratio of their take home pay to their rent. Paycheck divided by rent, full stop. If you follow this blog or Jeremy on twitter, you’ll know that one of the puzzles frequently revisited is why Americans are so pessimistic about the economic dynamics of the last 20 to 30 years, and why younger people seem terribly aggrieved about their relative economic status.

So if generational income is fairly consistent and median home mortages account for a slightly declining fraction of median income, what gives? Well, it could all be one big economic mass hysteria, but I’ve got a simpler explanation: the ratio of rent to income to has skyrocketed in the places that young people want to live. Maybe I’m overprojecting my own lived experience, but when I was 25 I did not want to live in a rural area, the suburbs of a major city, or even the downtown of a minor city. I wanted to live in a proper big city. And for a young person, that means living in a small apartment, possibly with roommates, which is exactly the kind of housing places like California stopped building.

Why do so many young people seem pessimistic? Putting aside the absolute failure of politics to produce meaningful climate policy, the simplest explanation is that they have an unpleasant choice. They can live in the same places young people have always lived, only absent any possibility of savings and economic security. Or they can be dispersed from the cultural and economic capitals of our country, and try to build social networks without the benefits of the generational density, plethora of events, and dating markets that have been the hallmark of being a young person in the city since World War I (if not longer).

What will solve this? Policy? California has showed some glimmers of hope. Young people voting with their feet, moving to the shining middle-sized cities that are allowing for growth and affordable rents? Could be, but critical mass is real and growing into a proper metropolis takes decades. Work from home?

That’s interesting enough that I’ll write about it next week. I have thoughts and policy prescriptions, in case any major city is looking for a czar of housing policy (NB: I’m not qualified, but available).