Federal Reserve Study Finds Additional Building Won't Make City Housing More Affordable

I'm not someone who often reads whitepapers from the Fed, but isn't the paper saying something a little different than the article? Stuff like:

Using the estimated model, we then simulate the effect on rents of exogenously adding housing stock to the most expensive neighborhoods in each city. We find that increasing the housing stock in the most expensive neighborhoods by 5% would only reduce equilibrium rents in those neighborhoods by less than 0.5%. The implied rent elasticity is therefore quite low.

and:

One potentially important assumption behind our analysis throughout this paper is that our model treats each city as a closed economy. Although households can choose from among many different types of neighborhoods within the city, they cannot choose to live outside the city, and households from outside the city cannot choose to move to the city. [...] Thus, we caution against extrapolating our model’s elasticities to very large changes to the housing stock.

And in section 5.1, aren't they saying that the study assumes rents in the "outskirt" neighborhoods *can't* change? Are they also assuming for this model that an increase in housing supply is automatically associated with an increase of exactly enough people to occupy those new homes? These seem like pretty strange assumptions to make if you're trying to study housing affordability - I think most people can tell you that rents change and people move between cities.

Maybe something like "Federal Reserve study finds that a tiny increase in # of units in the most expensive neighborhood of a walled city where no one from outside the city is allowed to move in results in a small decrease in rents for that expensive neighborhood."

I feel like the paper goes out of its way to repeatedly make clear that the limitations of the study *don't* let them conclude that making a bunch of new housing won't reduce housing costs... and the title of the Forbes article is "Additional Building Won't Make City Housing More Affordable Says Fed Study"?

I would suggest for anyone interested in high-density planning and mixed-use TOD to take a short working vacation to the Southern Chinese city of Guangzhou. I lived there for 6 years and had a unique opportunity to examine the aforementioned approaches close-up. When it comes to density and mixed-use zoning, the Chinese have a thing or two to teach us.

When the supply side has been broken so much for so long doubling the housing supply doesn't do much to equilibrium prices when there is so much pent up demand. Demand in urban areas hasn't been satisfied in a looooong time. There are literally tens of millions of people waiting to buy at current prices or just below them.

Misleading title and article. The Federal reserve does say that additional building WOULD in fact reduce housing costs:

Add 5% more housing to the most expensive neighborhoods and the rents would drop only by 0.5%.

Maybe the author thinks it's disappointingly low, but it's still a drop. Furthermore, the study only looked at what would happen to a city's housing prices if housing were added ONLY to a SINGLE neighborhood, the most highly-desired and sought out neighborhood. "Table 3: Simulation Results - Increasing Housing Stock to Single Neighborhoods"

The study doesn't look at what would happen to prices if housing stock expanded city-wide, only at a scenario where all of a city's construction was concentrated in a single neighborhood where value was highest. a +20% housing stock increase in that case might mean just a 0,5% or 1% city-wide increase.

I would suggest for anyone interested in high-density planning and mixed-use TOD to take a short working vacation to the Southern Chinese city of Guangzhou. I lived there for 6 years and had a unique opportunity to examine the aforementioned approaches close-up. When it comes to density and mixed-use zoning, the Chinese have a thing or two to teach us.

We also present evidence to suggest that improving amenities in low-priced neighborhoods is a more cost effective way to reduce prices in high-priced neighborhoods, via a substitution effect, than directly building additional housing units in high-priced areas.

Gentrification.

The simulation finds that rents in city-centers where amenities are in high demand result in lower price elasticities. But the article notes that this is not true in the outer areas. In the outer areas, the more the supply is constrained by regulations, the higher the pressures will be......in the city center.

So, no, the article does not find what OP's title says.

This is the study cited - https://www.federalreserve.gov/econres/feds/files/2018035pap.pdf

Tweaked the title slightly, just so it was clear that these are results of an extensive Federal Reserve Study (and not just a particular person's blog or similar).

I'm so sick of this dumbass well economics is more complicated than a simple supply demand curve so supply demand is bullshit argument. It's stupid and it's designed for stupid people to repeat. If you buy this argument you're either dumb or not thinking very hard.

Just because there's more than just simple supply and demand at play doesn't mean that supply and demand aren't also at play.