In this episode of The REconomy Podcast™ from First American, the seventh and final episode in the Summer School series, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi delve into urban economics, from zoning regulations to land use patterns, examining the dynamics of monocentric and polycentric cities, while exploring the potential impact of remote work on traditional urban models.
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“If a city zones large areas for single-family homes at a low density and restricts the development of multifamily housing, it can limit the availability of more affordable housing options like apartments or duplexes. This can further exacerbate affordability issues, so zoning can make it harder and often costlier to build, and we all know by this point in the REconomy series that America faces a chronic housing shortage. Overly restrictive zoning can limit housing supply and drive higher prices, a dynamic we're seeing in today's market.” – Odeta Kushi, deputy chief economist at First American
Odeta Kushi -
Hello and welcome to episode 98 of The REconomy Podcast, our seventh and final session of the Summer School series, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey, Mark. So this episode marks the end of summer school, and what a great semester it's been.
Mark Fleming -
Hi Odeta, our final summer school episode. How bittersweet. But do we get a vacation now?
Odeta Kushi - Hardly.
Mark Fleming - So we can't really zone out just yet.
Odeta Kushi - And if you do, well, that's just a zoning violation in our book. And if those terrible puns haven't revealed today's topic, just yet, I'll just tell you, today we're covering urban economics. 101.
Mark Fleming - Yeah, terrible puns aside. That's correct, and it is an intro class to a very cool topic. In my mind, today, we're diving into the world of zoning regulations, the ins and outs of monocentric and polycentric cities, and how remote work's. impact on urban dynamics may have resulted in shifts in housing demand and commuting patterns.
Odeta Kushi - With just enough puns to keep things well planned. Okay, let's start with the basics. Zoning regulations. These are the rules that dictate how land in a city can be used. It's sort of like a city's version of a playbook telling developers where they can build housing, what kind of housing, where to put commercial spaces, and even how tall buildings can be.
Mark Fleming - Exactly. Imagine trying to build a skyscraper in the middle of a suburban neighborhood. Zoning laws are there to make sure you don't end up with a 50-story tower overshadowing someone's backyard barbecue.
Odeta Kushi - But zoning isn't just about height. It's also about making sure that cities have a balanced mix of residential, commercial, and industrial spaces. Some areas are zoned strictly for homes. Indeed, according to a New York Times analysis, around 75% of residential land in the U.S. is specially zoned for single-family homes only. More on that in a minute. Some areas are zoned for businesses and others for mixed use.
Mark Fleming - Now, zoning has a long history, and not without its controversies. Some of the early zoning practices were used to segregate communities and exclude certain groups from specific areas, a dark and complex past that we won't delve into deeply today, but it is important to acknowledge.
Odeta Kushi - It certainly is. What's important to know for our discussion today is that zoning has shaped the physical and economic landscapes of cities for better or worse, and continues to do so in ways that affect everyone who lives in them.
Mark Fleming - Yes, you mentioned single-family zoning just a minute ago. That's been on the news quite a bit lately, because it's viewed as an impediment to solving our housing affordability crisis. In some residential areas, zoning laws make it illegal to build apartments, and zoning laws often restrict the development of new housing by capping building heights, limiting density or preserving certain types of land use.
Odeta Kushi - If a city zones large areas for single-family homes at a low density and restricts the development of multifamily housing, it can limit the availability of more affordable housing options like apartments or duplexes. This can further exacerbate affordability issues, so zoning can make it harder and often costlier to build, and we all know by this point in the REconomy series that America faces a chronic housing shortage. Overly restrictive zoning can limit housing supply and drive higher prices, a dynamic we're seeing in today's market.
Mark Fleming - And this is where the debate over zoning reform comes in. Some argue that we need to loosen zoning restrictions or regulations to allow for more housing development, especially in areas close to jobs and public transportation. This could help increase the supply of housing and make cities more affordable.
Odeta Kushi - But, then others worry that too much development could lead to overcrowding, strain on infrastructure and the loss of green spaces or historic neighborhoods. It's a tough balance to strike, and different cities are experimenting with different approaches. For example, some cities are embracing concepts like upzoning, where areas that were previously restricted to low-density development are re-zoned to allow for higher density housing. This can help create more housing units in areas where demand is high, but can also be controversial, especially among residents who are concerned about changes to their neighborhoods. This is where the NIMBY, or Not In My Backyard, versus YIMBY, or Yes In My Backyard, debate comes from that we've all heard about.
Mark Fleming - That's right, but the bottom line is that zoning directly impacts land use patterns, the physical layout of our cities and suburbs. Zoning decides where residential areas end and commercial districts begin, which, in turn, shapes how cities grow and function. You know, all this talk of cities has me humming Starship's "We built this city," because, really, we did build these cities, literally and figuratively through zoning laws, land use decisions and urban planning.
Odeta Kushi - All right. Well, that will serve as our '80s reference for this episode, and a nice segue to a discussion of city models.
Mark Fleming - Wait a minute. Does that mean that I have successfully included an '80s reference in every summer school episode?
Odeta Kushi - I don't know. We might need a fact check on that one, but I'm pretty sure you did. So I think congratulations are in order.
Mark Fleming - I hear the sarcasm there. I definitely hear the song.
Odeta Kushi - It is a huge accomplishment. All right, moving on to the topic of city models. There are primarily two related models that theoretically describe the patterns of land use, monocentric and polycentric city models. In a monocentric city, the further you move away from the center, the less dense and developed things typically get. So, when we talk about a monocentric model, we also have to talk about the price gradient, which refers to the rise in value for a unit of land as one moves closer to the central business district or CBD. So, in this model, people commute from the suburbs into the city center and are willing to pay more per unit of land to live closer to work, shopping and entertainment. The zoning here is often strict, with high-density areas in the center and lower-density areas on the outskirts. So, think of cities like New York, where most commercial activity and multifamily dwellings are located near the city center, and then single-family homes are located in the suburbs. An international example would be Paris. This would also be a great time to grab the handout for this episode, if you have it handy, and turn to the third page for episode 7. Here you'll see diagram examples of monocentric and polycentric city models.
Mark Fleming - Diagrams are always helpful in this kind of scenario. Speaking of polycentric, this model is one where, instead of one main hub, there are multiple centers of activity. The Washington, DC metropolitan area is an example of a polycentric city. For those of you on the West Coast, another example is Los Angeles. There's Downtown LA, there's also Santa Monica, Pasadena, Hollywood, each with its own center of economic activity.
Odeta Kushi - So, in a polycentric urban model, there are sort of multiple downtowns, if you will. And, in the debate of monocentric versus polycentric urbanization, research has shown that independent polycentric urban models that are strongly linked achieve better development results than cities depending on a main core city.
Mark Fleming - Which makes sense. I'm thinking about DC, where the polycentric city model means we have a more even distribution of activities, which can help reduce congestion. You can choose to stay in downtown or head over to Arlington or Fairfax. You have choices and less concentration in one spot.
Odeta Kushi - And yet, I always choose downtown DC. But let's not forget that these models aren't mutually exclusive. Some cities blend elements of both, creating hybrid models, so you can have a strong central business district alongside several other significant hubs. So these types of cities can offer the best of both worlds, with a vibrant downtown and multiple centers of activity spread throughout the metropolitan area.
Mark Fleming - So true. And this brings us to how cities evolve over time. A city that starts out as a monocentric city might develop secondary centers as it grows, eventually becoming more polycentric. This evolution is often driven by changes in the economy, population growth, and, of course, those zoning regulations.
Odeta Kushi - And speaking of evolution, we cannot ignore the impact of recent trends like the rise of remote work. The COVID-19 pandemic has shown that traditional models of urban development are not necessarily set in stone. As more people work from home, the demand for office and retail space in central business districts has decreased, potentially altering the monocentric, or theoretical monocentric city model.
Mark Fleming - Yep, the pandemic changed the landscape of work, perhaps permanently, by changing commuting patterns for a large share of the labor force and introducing many to completely remote or hybrid work scenarios.
Odeta Kushi - Absolutely. Remote work has the potential to decentralize cities even further, right. People no longer need to be close to their workplace. They might choose to live in areas that offer more space, affordability or better quality of life, rather than being tied to a CBD. This could accelerate the shift towards a polycentric model in many cities, where smaller hubs or even suburban areas become more self sufficient.
Mark Fleming - But, wait, I'm dying to know, what does the research tell us?
Odeta Kushi - Well, you came to the right person. We know that there was a shift to the suburbs, even prior to the pandemic, as millennials were aging into their prime home-buying years and choosing to move out of the urban core. But, of course, the untethering of workers from that downtown office accelerated the shift to the suburbs and exurbs and where the people go for services. Some of the research in the aftermath of the global pandemic revealed that retail spending and housing demand shifted away from city centers to the periphery in what has been dubbed the donut effect. It was estimated that approximately 15% of population and business establishments have moved from CBDs to the suburbs. The shift of the suburbs is accompanied by reduced demand for dense living.
Mark Fleming - But, and classic economist here, on the other hand, research shows that remote work hasn't completely untethered workers from the cities they work in. Within metro reallocation is stronger than between metro reallocation of workers, especially from large, expensive cities to smaller ones. That is, there is less evidence for large-scale movement of activity from large cities to smaller ones. Hybrid working arrangements have given rise to longer commutes fewer times a week, but have not necessarily made it feasible for workers to leave the cities of their employer altogether.
Odeta Kushi - So, to bring this back to the mono and polycentric city models, recall that in the monocentric city model, the price gradient is such that the center is more valuable. Research has been done in the aftermath of the pandemic to test whether the shift in housing demand away from the city center to the suburbs has resulted in a flattening of the house price gradient. One such paper is from the OECD and it uses a house price dataset covering 16 OECD countries.
Mark Fleming - I think it might be helpful for our listeners here to ask, what do you mean by flattening, and what does that just paper conclude?
Odeta Kushi - So flattening of a house price gradient refers to this phenomenon where the difference in home prices between the city center and the outskirts becomes less pronounced. So, when home prices are higher near the CBD and they gradually decrease as you move further away, this creates a steep price gradient. When this gradient flattens, it means that the premium for living close to the city center decreases and the price differences between central and peripheral areas become smaller. And this paper does corroborate the idea of a flattening house price gradient, but indicates that only large metropolitan areas show statistically significant flattening.
Mark Fleming - While the question remains about the extent to which the shift is permanent, the impact of remote work and shift to the suburbs has implications for urban planning, land use, design and zoning regulations.
Odeta Kushi - That's right. I mean, for one, if the suburbs are becoming as desirable as the city center, do we need to rethink how we allocate land for residential, commercial, industrial use, or how we manage infrastructure, like public transit to accommodate this new reality in the suburbs?
Mark Fleming - So, whether you're an urban planner, a homeowner, or just someone like us, fascinated by how cities work, it's clear that the shifts we're seeing now could have long-lasting effects on the future patterns of urban development, and that's something worth paying attention to.
Odeta Kushi - I would absolutely agree. Well, as much as it saddens me to say it, this does conclude The REconomy Summer School Series,, but don't worry, we have more great episodes coming up, including a special one for our 100th episode. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
Mark Fleming - We built this podcast, we built this podcast...
Odeta Kushi - I actually did get stuck in my head...
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2024 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.