Thanks for this great explainer. This fits well with your emphasis on the need for better economic theory to understand housing markets and your critical work, such as "Evidence-Lite Zone". There are theoretical simplifications that are linked to statistical work that attributes too much causation to correlations, despite 'controlling' for this and that. All of this aligns with my own view that far too much weight has been placed on regulation as an exogenous barrier and not attention on the endogenous layering of forces that are housing markets. If I can add a simple example, if the clustering by income and the positive amenity affects of valuable locations and densification create higher land values, that may induce land owners to expect escalationg prices and to reduce their willingness to sell in the present but wait for even higher prices. There are feedback effects here. If something like this is happening, then as D shifts out due to higher incomes and higher amenity (just what Glaeser used to argue in his "Consumer City" pieces) then higher land prices are an increased cost on the S side. In short, a Demand increase will cause the S curve to also shift upward or to steepen (lowering elasticity) and this will further increase housing prices. No regulation needed to grasp this effect, just an endogenous link between increased willingness to pay and the price needed to induce more supply. I think areas with higher housing prices, such as coastal California and parts of the US eastern seaboard, have been leaders in this process and that the dynamics of a longer-term increased willingness to pay to live in valuable urban spaces is unfolding across the US and in other places too. This is a historical shift related to incomes, lifestyles, and the complex dynamics that sets off in the housing markets. Regulation that protects higher income areas from rental housing and lower-income residents is pernicious in itself as I see it. This requires targeted opposition on equity grounds, but this is not the same as the broader faith in de-regulatino as the 'solution' to an inadequately understood housing crisis. Thanks for your continuing to link policy to more nuanced theory! This is desperately needed before we over incentive developement in ways that we may regret as a new type of 'urban renewal'
Your comment that "There are feedback effects here [from expectations of price growth to delayed development and rising prices]" is good. It essentially says speculative incentives shape dynamic decisions about new housing investment.
You framed it in terms of reasons the supply curve could be inelastic. I agree. The supply curve is shorthand for some dynamic process. In that dynamic process, the choice to develop land centres on whether to do so today or wait for tomorrow.
I like to express the upshot as "housing supply only begins when speculation ends".
In other words, speculation and housing development are two sides of a coin. You can't understand one without understanding the other.
This is where real options modelling of the dynamic process comes it. That modelling is essentially premised on the "develop vs delay" decision.
And you just reasoned through some of that logic in words, boiling down the consequences into static S/D form.
My subscription lapsed, to posting a short note about the S&D Explainer. Some great stuff! I look forward to part II, as so far this is a kind of reallocation exercise, which is crucial as much of the market is in already built housing on already occupied land. This helps with the understanding willingness to change (pay), but once the costs of adding new stock get added, then the issues of land prices and other costs can be addressed more directly and put together with demand side pressures. I like the question that one reader posed about the measure of demand, especially as wealthier buyers cluster in 'high value' locations and. bid up prices. I suspect that this drives speculative land hoarding and affects timing of building and selling. I'll keep an eye out for next parts.
This theory seems like it requires developers to be able to costlessly hold onto land indefinitely, which isn't realistic for most developers who use leveraged financing and face interest payments, face carrying costs like property taxes/ongoing site security, and would encounter capital constraints when they go to their next deal.
Yes. In a market equilibrium, the benefit of waiting in terms of rising values should equal the cost of waiting in terms of taxes etc. So while SOME landowners might not WANT to wait, across a market there will be no better choice than to wait sometimes.
I appreciate the framework, but I'm curious about a key assumption that land ownership operates similarly to bond trading, where patient holders can efficiently time the market. Is there evidence that 'patient property owners' actually dominate land markets in practice? From what I understand, most developers face significant financing constraints that actively work against this strategy. Banks typically require construction deadlines, performance bonds, and ongoing interest payments that create pressure for active development rather than strategic delay.
The existence of some property owners who face certain constraints does not change the market outcome. Maybe those owners DO take a chance and develop, and by doing so delay other projects by more patient owners.
I'd like to make sure I understand the mechanism you're describing. When you say constrained developers building 'delays other projects by more patient owners', can you help me understand how that works?
The "patient-owner" phraseology is simplified. Capital markets -- bankers and equity partners-- dictate patience into the other roles particularly developers.
Apartments aren't built for tenants, they're built for investor-owners to capture new net rent flows, similar to bond investors.
"Demand" is not people looking to lease an apartment, its investors looking to buy apartments to capture rent. This is key. Renters are not demand. Investors are demand.
Institutional investors won't finance or buy a new 1%-yield apartment, they'll wait for new rents at competitive yields.
An "impatient" owner willing to build "early" to absorb "new" rents at lower yields will delay institutional investors from absorbing those same rents. Two buildings can't capture the same rent dollar. Once that rent dollar is captured, investors must wait for more "new" rent to be captured at higher yields.
New rents come from new incomes or increases in existing incomes.
Lenders and buyers play by the same rules. If projected rent yields won't attract buyers it won't attract lenders. Most developers don't have the cash to build without a loan. So they are stuck in the system.
Two adjacent sites. Two owners. One patient and one impatient. The patient one will develop whenever seems best. They have a long horizon and expect gain on waiting to be equal or more than the cost on waiting. If the impatient neighbour develops now, the patient one waits longer than otherwise.
Rarely is it the case in an infill development that a developer will first buy the land to hold at increase property tax rates waiting for the right market conditions. Usually they will negotiate an option to buy at a price subject to approval of a proposed project ( whose expected yield would support the negotiated price.) The landowner cannot expect the future land price today without the future project yield so they are in it together.
This practice is used to manifest the land price/ portfolio optimization Cameron describes and avoid the holding costs you imagine. It's the practice used by developers who are going to transfer approvals and or projects to Equity partners and capital firms.
Developers build for them. Yes, there is a mom and pop market or "regional" market too, and I don’t know their respective sizes.
I recommend that you read a trade magazine such as "Commercial Observer" to learn real business practices, and visit the development projects page of any city in Silicon Valley and read through some of the historical projects and their timelines to understand how it really works.
Perhaps a few examples can help. I live in Redwood City California close to the heart of Silicon Valley which continues to boom at least in development "futures."
In particular, read the section "New Jobs to New Housing Units Balance" and note their future-looking analysis.
"We found: There are approximately 330 large land development projects either approved, under review or under construction in San Mateo County. .... These projects represent approximately 40 million square feet of net new construction. ... more than 12 times the size of the Facebook campus in Menlo Park. If all the projects are constructed, they will create more than 106,000 new jobs in San Mateo County, probably in the next five years, but there will be fewer than 25,000 new housing units produced."
Now surely you don't believe the entire real estate market and its financiers expect to build 12 new Facebook campuses in San Mateo county in the next five years.
Are they really going to bring all that development on line regardless of market conditions and with no current prospect of filling it?
So what about "delays" because of market conditions and holding costs and absorption rates?
New offices continue to be approved and owner/developers are negotiating long-term entitlements via devices called "developer's agreements". The terms can often exceed ten years. To get DA's, developer's promise the city generous benefits which materialize only after the project is built.
The holding costs are minimal because the sites are existing INFILL sites and the current owners and their developers simply continue current uses with current conditions and bank the approvals for a future date when market conditions become favorable.
Two I know of are in Menlo Park, one in Redwood City, and one in San Carlos. One in Menlo Park is a 52 acre site owned and used by Facebook ("Willow Village") which they would intensify under a set of banked approvals and are waiting under a long-term developer's agreement. It would also include 1700 housing units to go along with increases in office, hotel, and retail. Another is a 52-acre site owned by SRI ("Parkline") a non-profit research firm which they would lease to a developer under a 99-year lease where the developer would build 1.1M sf of new office and 800 housing units. They want a developer's agreement from the City which they will bank at no cost to either to SRI or to the developer. It will be business as usual until then. They currently expect to build by 2031, and that has been pushed back once already.
And yes, anything currently under construction may be at risk. But new approvals are being banked.
And yes, an owner who must sell today would do so at a "discount" to future market expectations. Some might. Developers who sell to Equity funds and asset managers will not.
Approvals are marketable commodities that can be bought and sold. In-fill approvals by current owners with developer partners can persist with existing uses until market conditions become ripe for developing the project.
I also happen to own a modest house in Menlo Park which I rent. The rent now barely covers my carrying costs, but it does. In the beginning, it did not. I get solicited each day by some speculator to buy my house. Literally once a week. But I hold the house because I understand it is within walking distance of the Facebook and SRI projects and its value is ever-increasing. It may become 2-4 future units, or a MacMansion, but for now it sits in my portfolio.
Even as a mom and pop owner, I practice portfolio management.
I wonder to what extent housing is usually tied up with community/whanau and forms the basis for communal goods is missing from this picture - this is how the majority of home owners view housing, rather than a thing to be bought and sold.
Thanks for this great explainer. This fits well with your emphasis on the need for better economic theory to understand housing markets and your critical work, such as "Evidence-Lite Zone". There are theoretical simplifications that are linked to statistical work that attributes too much causation to correlations, despite 'controlling' for this and that. All of this aligns with my own view that far too much weight has been placed on regulation as an exogenous barrier and not attention on the endogenous layering of forces that are housing markets. If I can add a simple example, if the clustering by income and the positive amenity affects of valuable locations and densification create higher land values, that may induce land owners to expect escalationg prices and to reduce their willingness to sell in the present but wait for even higher prices. There are feedback effects here. If something like this is happening, then as D shifts out due to higher incomes and higher amenity (just what Glaeser used to argue in his "Consumer City" pieces) then higher land prices are an increased cost on the S side. In short, a Demand increase will cause the S curve to also shift upward or to steepen (lowering elasticity) and this will further increase housing prices. No regulation needed to grasp this effect, just an endogenous link between increased willingness to pay and the price needed to induce more supply. I think areas with higher housing prices, such as coastal California and parts of the US eastern seaboard, have been leaders in this process and that the dynamics of a longer-term increased willingness to pay to live in valuable urban spaces is unfolding across the US and in other places too. This is a historical shift related to incomes, lifestyles, and the complex dynamics that sets off in the housing markets. Regulation that protects higher income areas from rental housing and lower-income residents is pernicious in itself as I see it. This requires targeted opposition on equity grounds, but this is not the same as the broader faith in de-regulatino as the 'solution' to an inadequately understood housing crisis. Thanks for your continuing to link policy to more nuanced theory! This is desperately needed before we over incentive developement in ways that we may regret as a new type of 'urban renewal'
Thanks Jonathan. I like your summary.
Your comment that "There are feedback effects here [from expectations of price growth to delayed development and rising prices]" is good. It essentially says speculative incentives shape dynamic decisions about new housing investment.
You framed it in terms of reasons the supply curve could be inelastic. I agree. The supply curve is shorthand for some dynamic process. In that dynamic process, the choice to develop land centres on whether to do so today or wait for tomorrow.
I like to express the upshot as "housing supply only begins when speculation ends".
In other words, speculation and housing development are two sides of a coin. You can't understand one without understanding the other.
This is where real options modelling of the dynamic process comes it. That modelling is essentially premised on the "develop vs delay" decision.
And you just reasoned through some of that logic in words, boiling down the consequences into static S/D form.
My subscription lapsed, to posting a short note about the S&D Explainer. Some great stuff! I look forward to part II, as so far this is a kind of reallocation exercise, which is crucial as much of the market is in already built housing on already occupied land. This helps with the understanding willingness to change (pay), but once the costs of adding new stock get added, then the issues of land prices and other costs can be addressed more directly and put together with demand side pressures. I like the question that one reader posed about the measure of demand, especially as wealthier buyers cluster in 'high value' locations and. bid up prices. I suspect that this drives speculative land hoarding and affects timing of building and selling. I'll keep an eye out for next parts.
This theory seems like it requires developers to be able to costlessly hold onto land indefinitely, which isn't realistic for most developers who use leveraged financing and face interest payments, face carrying costs like property taxes/ongoing site security, and would encounter capital constraints when they go to their next deal.
Yes. In a market equilibrium, the benefit of waiting in terms of rising values should equal the cost of waiting in terms of taxes etc. So while SOME landowners might not WANT to wait, across a market there will be no better choice than to wait sometimes.
Land is an asset after all.
I explain this in detail here.
https://www.fresheconomicthinking.com/p/explainer-markets-efficiently-delay?utm_source=publication-search
And I explain the selection mechanism by which trades of property result in the most patient and optimistic people/businesses owning land
https://www.fresheconomicthinking.com/p/patient-property-owners?utm_source=publication-search
I appreciate the framework, but I'm curious about a key assumption that land ownership operates similarly to bond trading, where patient holders can efficiently time the market. Is there evidence that 'patient property owners' actually dominate land markets in practice? From what I understand, most developers face significant financing constraints that actively work against this strategy. Banks typically require construction deadlines, performance bonds, and ongoing interest payments that create pressure for active development rather than strategic delay.
The existence of some property owners who face certain constraints does not change the market outcome. Maybe those owners DO take a chance and develop, and by doing so delay other projects by more patient owners.
I'd like to make sure I understand the mechanism you're describing. When you say constrained developers building 'delays other projects by more patient owners', can you help me understand how that works?
The "patient-owner" phraseology is simplified. Capital markets -- bankers and equity partners-- dictate patience into the other roles particularly developers.
Apartments aren't built for tenants, they're built for investor-owners to capture new net rent flows, similar to bond investors.
"Demand" is not people looking to lease an apartment, its investors looking to buy apartments to capture rent. This is key. Renters are not demand. Investors are demand.
Institutional investors won't finance or buy a new 1%-yield apartment, they'll wait for new rents at competitive yields.
An "impatient" owner willing to build "early" to absorb "new" rents at lower yields will delay institutional investors from absorbing those same rents. Two buildings can't capture the same rent dollar. Once that rent dollar is captured, investors must wait for more "new" rent to be captured at higher yields.
New rents come from new incomes or increases in existing incomes.
Lenders and buyers play by the same rules. If projected rent yields won't attract buyers it won't attract lenders. Most developers don't have the cash to build without a loan. So they are stuck in the system.
Two adjacent sites. Two owners. One patient and one impatient. The patient one will develop whenever seems best. They have a long horizon and expect gain on waiting to be equal or more than the cost on waiting. If the impatient neighbour develops now, the patient one waits longer than otherwise.
In the last sentence shouldn't it say the patient one waits longer than otherwise?
Below are some real world examples.
Rarely is it the case in an infill development that a developer will first buy the land to hold at increase property tax rates waiting for the right market conditions. Usually they will negotiate an option to buy at a price subject to approval of a proposed project ( whose expected yield would support the negotiated price.) The landowner cannot expect the future land price today without the future project yield so they are in it together.
This practice is used to manifest the land price/ portfolio optimization Cameron describes and avoid the holding costs you imagine. It's the practice used by developers who are going to transfer approvals and or projects to Equity partners and capital firms.
Developers build for them. Yes, there is a mom and pop market or "regional" market too, and I don’t know their respective sizes.
I recommend that you read a trade magazine such as "Commercial Observer" to learn real business practices, and visit the development projects page of any city in Silicon Valley and read through some of the historical projects and their timelines to understand how it really works.
Perhaps a few examples can help. I live in Redwood City California close to the heart of Silicon Valley which continues to boom at least in development "futures."
Go here to see an analysis of the current and future jobs housing analysis for San Mateo County from 2021. https://sustainablesanmateo.org/home/indicators/2021-key-indicator-report/housing-analysis/
In particular, read the section "New Jobs to New Housing Units Balance" and note their future-looking analysis.
"We found: There are approximately 330 large land development projects either approved, under review or under construction in San Mateo County. .... These projects represent approximately 40 million square feet of net new construction. ... more than 12 times the size of the Facebook campus in Menlo Park. If all the projects are constructed, they will create more than 106,000 new jobs in San Mateo County, probably in the next five years, but there will be fewer than 25,000 new housing units produced."
Now surely you don't believe the entire real estate market and its financiers expect to build 12 new Facebook campuses in San Mateo county in the next five years.
Are they really going to bring all that development on line regardless of market conditions and with no current prospect of filling it?
So what about "delays" because of market conditions and holding costs and absorption rates?
New offices continue to be approved and owner/developers are negotiating long-term entitlements via devices called "developer's agreements". The terms can often exceed ten years. To get DA's, developer's promise the city generous benefits which materialize only after the project is built.
The holding costs are minimal because the sites are existing INFILL sites and the current owners and their developers simply continue current uses with current conditions and bank the approvals for a future date when market conditions become favorable.
Two I know of are in Menlo Park, one in Redwood City, and one in San Carlos. One in Menlo Park is a 52 acre site owned and used by Facebook ("Willow Village") which they would intensify under a set of banked approvals and are waiting under a long-term developer's agreement. It would also include 1700 housing units to go along with increases in office, hotel, and retail. Another is a 52-acre site owned by SRI ("Parkline") a non-profit research firm which they would lease to a developer under a 99-year lease where the developer would build 1.1M sf of new office and 800 housing units. They want a developer's agreement from the City which they will bank at no cost to either to SRI or to the developer. It will be business as usual until then. They currently expect to build by 2031, and that has been pushed back once already.
And yes, anything currently under construction may be at risk. But new approvals are being banked.
And yes, an owner who must sell today would do so at a "discount" to future market expectations. Some might. Developers who sell to Equity funds and asset managers will not.
Approvals are marketable commodities that can be bought and sold. In-fill approvals by current owners with developer partners can persist with existing uses until market conditions become ripe for developing the project.
I also happen to own a modest house in Menlo Park which I rent. The rent now barely covers my carrying costs, but it does. In the beginning, it did not. I get solicited each day by some speculator to buy my house. Literally once a week. But I hold the house because I understand it is within walking distance of the Facebook and SRI projects and its value is ever-increasing. It may become 2-4 future units, or a MacMansion, but for now it sits in my portfolio.
Even as a mom and pop owner, I practice portfolio management.
I wonder to what extent housing is usually tied up with community/whanau and forms the basis for communal goods is missing from this picture - this is how the majority of home owners view housing, rather than a thing to be bought and sold.