Development Studies: Socio-economic Development from an Interdisciplinary Perspective

Saleha Erdmann

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The Social Costs of Supply and Demand in the Urban Housing Market

Econ 113--Will, Interim 2004

As the United States is becoming increasingly urbanized, the demand for housing has risen significantly in recent decades.  Adam Smith’s law of supply and demand can easily be applied to the American housing situation today.  Smith explained that supply and demand are interdependent economic processes and the market is at equilibrium when the amount demanded equals the amount supplied.  Ideally, the market adjusts itself to return to equilibrium, for example, when demand rises for a certain good or service, production rises to meet that demand, thus increasing supply.  If supply exceeds demand prices will fall in order to make a product more attractive to consumers.  However, if demand exceeds supply prices will rise because consumers will be willing to pay more for the product, causing inflation.  The increasing demand and rise in prices of the limited supply of urban housing has created inflation in the housing market, in keeping with Adam Smith’s laws of supply and demand. Eggert identifies two kinds of inflation that are easily applicable here: cost-push inflation—resulting from a rise in costs, and demand-pull inflation—resulting from a rise in demand.  The cost-push and demand-pull aspects of inflation in the housing market have solicited two unsettling responses:  gentrification and urban sprawl.  Today’s urban housing market illustrates the social costs of supply and demand, which Smith did not have the context to address in his lifetime but which are highly relevant in our society.  While Smith’s laws of supply and demand are valuable they require some revision, at least in terms of the housing market, and that revision must include a considerable amount of government intervention.

As available housing has decreased in urban areas, the prices have risen, making it difficult for low-income earners to find or keep affordable housing.  Imagine this scenario:  Group A is made up of low income people who live in a certain neighborhood, Group B is made up of middle and upper income people.  Someone from Group B is attracted to the cheap housing prices in Group A’s neighborhood, then he buys a home there, and fixes it up.  By making his home more attractive, he improves the appearance of the neighborhood, which attracts another person from Group B.  Soon, the neighborhood draws in many people from Group B who can afford to pay more for housing.  The property value rises, landlords respond by raising the rent, and people in Group A suddenly cannot afford their housing, forcing them to move out of the neighborhood.  Atkinson describes this process of displacement as the, “class based colonization of cheaper residential neighborhoods,”  and he adds that the improvements made to the neighborhood’s appearance by Group B are “reinvestment in the physical housing stock (2344).”  This is gentrification—essentially the displacement of a poorer population by a wealthier one.  According to the laws of supply and demand this is simply the way the market must function, however, it has some disturbing effects on disadvantaged groups that if left unchecked could have serious societal consequences.

In Legate and Hartman’s 1969 chapter they analyze the demographic of “inmovers” and “outmovers”.  At that time, inmovers were predominantly young adults (either single or childless couples), white, in the middle to upper income range and had professional or managerial jobs (184).  Outmovers were a much more heterogeneous group with a wide range of ages (although a significant number were elderly or children), a range of household make up, were in the lower to middle income range and had blue-collar or low status white-collar jobs (189).  At that time, most outmovers were white, but the authors added that displacement of minority communities was becoming a growing trend (195).  Since 1969, the displacement of poor minority communities has become much more common, as is illustrated in many Chicago neighborhoods today (Perez).  Thus, gentrification as an issue of income inequality has taken on racial proportions as well. 

Some argue that gentrification is not a bad thing, it revitalizes deteriorating neighborhoods and there is “hope that [the gentrifiers] may civilise the city through economic trickle down and their status as role models (Atkinson, 2347).”  Others claim that gentrification will encourage racial integration, however, Legates and Hartman found that in 1969 gentrification exacerbated racial tension (194).  While gentrification may have some positive economic effects locally, it does not erase the demand for affordable housing, it simply relocates it.     

While housing prices rise in urban areas, another response is the construction of homes beyond the cities where land is cheaper and there is unlimited space—a process known as urban sprawl.  This has increased the supply of housing to respond to demand, but quantity usually takes priority over quality. 

Urban sprawl, the spread of heterogeneous suburbia, encompassing a broad spectrum of ‘cracker-box living’ styles in an uninspiring standardized conformity (Green, 135).

To be sure, new housing is needed, but this particular realization of that need has produced negative effects on the environment through pollution, eaten away at open spaces and farmland (Heim), encouraged obesity (Finley), urban degradation, racial and class tension and feelings of alienation (Bonfiglio).   There is more affordable housing as a result of urban sprawl, but it is often inaccessible to low-income people due to the absence of public transportation.  Lack of public transportation means that only car owners can easily travel back and forth between the city and suburbs, effectively cutting off low-income people from access to many jobs.  Dependency on cars has also contributed to the epidemic of obesity sweeping the country and more pollution from green house gas emissions.  Urban sprawl also has a tendency to use resources inefficiently and consume ecosystems, thus threatening wildlife and human health.

So what is to be done about this demand for urban housing?  Cost-pushed inflation has given high-income people the advantage, often resulting in gentrification.  Demand-pulled inflation has triggered the building of new homes, often resulting in urban sprawl.  To be sure, certain aspects of this economic behavior are healthy and beneficial to the rest of society.  However, the social costs of such economic activity have negative long-term implications for us all.  Environmental degradation threatens our health, quality of life and access to resources.  Racial tension and a growing number of Americans in intense poverty is simply unfair to its victims, but it also escalates crime, which threatens everyone.

 The supply of housing must be increased, but more efficiently, and only government can enforce this.  Land in the city should be redeveloped and smaller homes should be built, or better yet, apartments and duplexes.   A more efficient use of land would limit urban sprawl.  Businesses and government should cooperate to build affordable housing in the city near available jobs and schools, or at least near public transportation that makes jobs and schools easily accessible.  One way to provide temporary jobs would be to employ low-income people in building affordable housing, and a percentage of their wages could automatically be put towards paying for a home. 

The government should deliberately develop areas with mixed income housing.  This means that housing is available within a wide range of prices that allows high-income and low-income people to live together.  A diversity of incomes in one area would help prevent the dangerous conditions that often emerge in poor neighborhoods, and would also keep in check the wastefulness that often emerges in rich neighborhoods in an attempt to “keep up with the Joneses.”   In fact, a project to create a mixed-income neighborhood has already been successfully undertaken in Indianapolis.  Beginning in 1997, the city government in Indianapolis worked with a private contractor to build the development and several local banks agreed to provide reduced mortgage rates for low-income buyers.  The city also subsidized property taxes for low-income home-buyers for the first five years of their residency (Palladino). 

If more affordable housing is available, the quality of city life will improve as the gap between rich and poor narrows.  But that still leaves the problem of urban sprawl to be dealt with.  Government should provide strict limits on how far and where urban sprawl can develop, and public transportation should be easily accessible to reduce the use of cars and to make it easier for low-income people to find jobs.  Environmental regulations should be rigorously enforced and there should be set limits to the size of a home’s lot.  All these actions would force development to be more responsible, more compact, and consequently, more efficient.

In an ideal world, people would settle for smaller homes, instead of the supersized versions that are symptomatic of urban sprawl.  Americans would waste less and would voluntarily use their surplus wealth to help those who needed more.  However, we do live in a capitalist society that is driven by self-interest, which is usually realized through short-term goals.  That is why government is a necessary mediator in the housing market, it can advocate for those who are invisible and unable to compete with stronger self-interested actors.  In the long-term, the happiness of all people is in everyone’s self-interest. 

Competition should remain a driving force in the housing market, but government must intervene when it is necessary to help meet the needs of those who cannot afford decent housing.  Government should also work to make more decent housing available, but to limit excessive growth of housing in general.  However, if individuals do not participate in the process, then government can only retard the social costs of a competitive urban housing market.  If Americans reconsidered their priorities and focused less on size and more on quality, over consumption would not be a problem.  Perhaps beautiful gardens or energy efficiency would be the new standard for which society strove.  We must work towards a society that demands efficient, smaller housing in diverse neighborhoods, a society where thinking in the long-term is standard.  Smith himself wrote, “He is certainly not a good citizen who does not wish to promote, by every means in his power, the welfare of the whole society of his fellow-citizens.”

Works Cited:

Atkinson, Rowland.  November 2003. “Introduction: Misunderstood Saviour or Vengeful Wrecker?  The Many Meanings and Problems of Gentrification.”  Urban Studies. 40 (12): 2343-2350.

Bonfiglio, Olga.  4 November 2002.  “Addressing Urban Sprawl.”  America.  In  Andrew I Cavin, Ed.  2003.  Urban Planning. (The Reference Shelf.  v75, n4).  United States: H.W. Wilson Company.

Eggert, James.  1997.  What is Economics? 4th Ed.  Mountain View, CA: Mayfield Publishing Company.

Finley, Don.  10 December 2002. “Poor Urban Planning Hinders the Pedestrian.”  San Antonio Express-News. In  Andrew I Cavin, Ed.  2003.  Urban Planning. (The Reference Shelf.  v75, n4).  United States: H.W Wilson Company.

Green, James L.  “Economic Issues in Urban Housing.”  In James L. Green. 1969  Economic Ecology: Baselines for Urban Development. Athens: University of Georgia Press.

Heim, Carol.  Jan. 2001.  “Leapfrogging, Urban Sprawl, and Growth Management: Pheonix, 1950-2000.”  The American Journal of Economics and Sociology.  60(1): 245.

Legates, Richard T. and Hartman, Chester.  “The anatomy of displacement in the United States.”  In Neil Smith and Peter Williams, eds.  1986.  Gentrification of the City.   London: Allen and Unwin, Inc.  pps. 178-203.

Palladino, Chris. March 2003. “If Revitalization can Occur on the Near North Side of Indianappolis, It can Occur Anywhere.”  Planning. In Andrew I Cavin, Ed.  2003.  Urban Planning. (The Reference Shelf.  v75, n4).  United States: H.W Wilson Company.

Perez, Gina M.  Spring 2002.  “The Other ‘Real World’: gentrification and the social construction of place in Chicago.”  Urban Anthropology and the Studies of Cultural Systems and World Economic Development.  31(1): 37.

Smith, Adam. The Theory of Moral Sentiments.  As cited in Muller, Jerry Z.  1993.  Adam Smith in His Time and Ours: designing the decent society.  New York: The Free Press.