The Musical Chairs Model of Housing Markets

I first developed this idea when commenting on this post on the Austin Contrarian.

Musical chairs is a pretty simple game. No matter how many people there are, if there’s one fewer chair, everybody will scramble hard to get a chair.  Not only does everybody want a chair, but everybody knows that everybody else wants a chair, so they all have to work extra hard to compete against one another.  Just add one more chair, though, and all of a sudden life gets leisurely.  It doesn’t matter whether you place the chair near the fastest person or the slowest person–everybody will shift over and eventually, even the slowest person will find that last remaining chair.

This is a decent start to a model for a housing market.  Just about everybody wants a place to live.  If there aren’t as many homes as there are people, people will have a hard time finding a place to live and they will start to scramble.   Soon, everybody knows somebody who has had to scramble to get a place to live so they, in turn, scramble to get a place to live as well–knowing that other people out there are competing with them.  In musical chairs, the last one left without a chair loses.  So, too, in the housing market; except that instead of being left out of the game, they have to sleep on the streets, or couchsurf, or crowd together many people in a bedroom.

In musical chairs, the fastest to a chair gets to sit in it.  In the housing market, roughly speaking, the person who is willing and able to pay the most for a given property gets to rent or buy it.  Instead of the slowest person losing, the poorest does.  Instead of competing on speed, renters and homebuyers compete both on speed and ability / willingness to pay.  Instead of chairs getting sat in faster and faster, prices (both purchase prices and rents) go higher and higher.  Even if a poorer person lucks out and manages to rent a great apartment for cheap, if there are others out there with more money still looking for homes, next year the landlord will probably raise the rent.

And, just as it doesn’t matter much in musical chairs whether you add a chair near the fastest person or the slowest person, it doesn’t matter much whether the new housing stock you build is dedicated to the richest folks or the poorest folks.  If you add a chair, everybody will just shift chairs until even the slowest has found a seat.  If you add housing, everybody will move around until even the poorest folks find the last remaining housing.  This is the phenomenon sometimes known as “filtering.”

Obviously, this isn’t a perfect model.  Even when there are as many homes as people, sometimes homes sit empty while people sit homeless.  However, in the environment Austin and most cities in the US are in right now, we have all the signatures of a game of musical chairs: low vacancy rates and high, rising prices.  There are more people scrambling for chairs than there are chairs.  In such an environment, the first and most important affordable housing strategy is not to focus on the mix of housing that gets added, it’s to focus on making sure enough new homes to house everybody get built and built fast.  Whether the new housing is super nice and intended for rich folks or super spartan and intended for poorer folks, people will shuffle until everybody finds a home.  But if there aren’t enough homes to go around, it won’t be the richer folks sleeping in the streets.

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The Musical Chairs Model of Housing Markets

11 thoughts on “The Musical Chairs Model of Housing Markets

  1. balor123 says:

    I’ve observed the same thing. I submitted a question to Zillow’s recent Obama on Housing Q&A asking why government housing support is squarely focused demand-side with little to no support supply-side. It’s no wonder our economy is a giant mortgage mess! Sadly, my question was not picked for the president to answer 😦

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  2. “Even if a poorer person lucks out and manages to rent a great apartment for cheap, if there are others out there with more money still looking for homes, next year the landlord will probably raise the rent.

    If you add a chair, everybody will just shift chairs until even the slowest has found a seat. If you add housing, everybody will move around until even the poorest folks find the last remaining housing. This is the phenomenon sometimes known as “filtering.”

    Obviously, this isn’t a perfect model.”

    I know some better models. Rent control and public housing.

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    1. Unfortunately, rent control can often result in shortages. In NYC, rent-controlled apartments are routinely snapped up within minutes of going on the market as available–this doesn’t necessarily make it easier to get a place. It just means that now the swift and/or well-connected are the ones who get affordable housing while prices rise for everyone else.

      I agree with the need to increase supply, but with one word of caution: the situation described above could also become a bubble, one where much building happens with the expectation of housing prices continuing to rise. If supply begins matching demand, prices will start to stagnate and ultimately drop–possibly leaving some folks underwater on their mortgages and some developers unable to recoup their losses. Given what a huge sector of the local economy real estate has become, I hope that the gap gets closed a little more gradually.

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  3. I agree with this ‘musical chairs’. There should be ‘as many homes as many people’ but unfortunately nowadays there are very many cases where a lot of people are homeless and they can’t afford a home and nobody does anything. To me, everyone needs to have their own ‘chair’ and we should struggle a bit to help those people that are really poor and have no possibilities to rent a house.

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