How Will We Adapt as Red States Reduce Their Supply of New Housing?

Some Thoughts About Glaeser and Gyourko (2025)

In recent decades, real estate economists have partitioned the United States into different types of housing markets. There are superstar markets, such as New York City, Los Angeles, San Francisco, and Boston, which have high demand for living due to their productivity, unique amenities, and vibrant culture. These areas feature both high demand and limited supply. Housing supply is limited due to both geographic factors, such as San Francisco's unusual shape and Manhattan’s island status, as well as local politics. Progressive cities build less housing than the average city. See my 2011 paper. Consequently, the combination of limited supply and high demand has led to soaring home prices in these productive and attractive cities.

In contrast, in many Red States and the South, such as Atlanta, Phoenix, Houston, and Dallas, housing has remained relatively affordable and easier to build. While the South may face challenges like humidity, and newer cities may not have the same cultural appeal as coastal cities, there is a clear contrast between the slow growth, culture, and high home prices in California and the more flexible, construction-friendly environment in Texas.

Fast forward to today, and the new research by Glaeser and Gyourko highlights a changing landscape. While it remains difficult to build in cities like Boston and San Francisco, areas where building was once straightforward, such as Atlanta, Phoenix, Las Vegas, and Dallas, have begun implementing land use regulations that limit growth. From a basic economic perspective, this shift has led to rising home prices in these once-affordable cities.

Here is a link to Ed and Joe’s new paper.

The authors of the study documenting these recent trends identify the winners and losers in this evolving scenario. In cities like Dallas and Atlanta, as it becomes more challenging to build, current homeowners benefit from increased property values and enjoy less competition from real estate developers. This dynamic illustrates the classic "homevoter hypothesis" playing out in states that were previously experiencing fast growth, such as North Carolina, Georgia, and Texas.

In the face of this regulatory land use convergence across the country, we must consider how to adapt to this challenge. For older homeowners, particularly baby boomers in cities like Atlanta, the news is promising: they will see their homes increase in value, providing more resources for retirement and potentially leaving an inheritance for their children. However, young individuals starting their lives are facing significant affordability challenges.

Here is Figure 2 from the Glaeser and Gyourko paper. Note the convergence over time, such that in recent years, across these six very different cities, their respective annual growth rates of housing units are declining and becoming more similar over time.

I aim to explore various optimistic approaches that can help our economy adapt to this regulatory convergence. I will offer several empirical hypotheses.

Firstly, people are marrying later and having fewer children, which reduces the demand for private space at the household level. This shift may result in more individuals being willing to share apartments or co-live, even as housing becomes more scarce in cities like Dallas. For example, in Brookline, MA, part of the Boston Metro area, there are large homes near Boston University where two households share a single dwelling but have a wall separating them. This is how a four-bedroom home could become two two-bedroom homes.

This scenario reflects the changing demographics of our society, as people are marrying later and either not having children at all or choosing to have fewer. Given the same number of homes, are there ways to divide them so that more people can share the space? We observe this trend in California, where individuals are constructing accessory dwelling units (ADUs) in their backyards to facilitate shared living arrangements.

As we consider these strategies for maximizing space, questions emerge about whether this represents the "good life." Does sharing a home lead to a lack of privacy? Life is full of trade-offs. For a middle-class family sharing a home with another family, when does this arrangement become beneficial, and when does it become annoying?

I believe we would need a clear legal framework that establishes property rights and outlines responsibilities through a contract detailing who is in charge of what, especially if we're going to live at a higher density with strangers. Issues of trust and legal rights become paramount in such situations.

Having previously lived in London, I observed that many people resided in small apartments and socialized in pubs and communal spaces. We see that Starbucks attracts young people who prefer working and socializing together rather than being isolated in their large living rooms. As more adults live unmarried or without children, shared living arrangements become one adaptation strategy for tackling the housing supply issue.

Critics may argue that our fertility challenges could worsen due to housing regulations. As housing prices increase, fewer people may feel comfortable having children, as having them takes up space, which is now seen as an additional cost. The full cost of raising children includes childcare, extra food, and additional living space. If city living becomes more expensive, this could contribute to a decline in fertility rates.

Another point to consider is that telecommuting is continuing to grow, with roughly one-quarter of the eligible workforce working from home daily. This trend allows more people to spread out and live further from their employers. The expanding commuting radius means that more towns and unincorporated areas can attract residents if housing is developed in these areas. Unincorporated land within a 50-mile radius of cities represents another source of housing supply, and I expect to see more homes constructed in such areas.

For example, I often pass through Tracy, California, when traveling from Los Angeles to Berkeley, and I believe that the rise of remote work has increased the demand for living in Tracy. Tracy is 55 miles from Berkeley, and there is plenty of new housing being built there.

We can adapt to the challenge of fewer homes in two ways: by living at higher density in existing homes, and through the rise of telecommuting, which allows people to live further from traditional work centers.

A third adaptation strategy is the possibility that immigration rates into the United States will decline, which could impact overall demand for housing in cities where immigrants have typically settled. This raises a question about whether these new limits on immigration will slow house price growth in specific cities that usually attract immigrants.

A fourth way we will adapt to regulatory convergence across the country is by converting commercial real estate into residential spaces. While bureaucratic hurdles still limit the conversion of commercial properties, there is clear evidence that in desirable metropolitan areas and central cities with older commercial office buildings, a strong desire exists to convert office towers into housing. A key question is which cities, such as New York City, will make this process increasingly feasible and reduce the regulatory red tape associated with conversions.

There are many interesting open research questions in real estate economics related to the consequences of regulatory limits in previously fast-growing cities. For example, if Atlanta becomes less welcoming to real estate developers, what are the geographic areas or sister cities that are more accommodating to growth? We may see growth shift from Atlanta to those cities. In economic terms, this is known as cross-elasticity. Just as Dunkin’ Donuts and Starbucks compete for customers—if Starbucks increases its prices without improving quality, some consumers will switch to Dunkin’ Donuts, a close but not perfect substitute—cities can compete for growth.

A final point.

Within a jurisdiction like Los Angeles County, which contains over 90 cities, it is reasonable to expect that some cities are more pro-growth than others. Could real estate developers participate in an auction where they pay a fee to the city within Los Angeles County that is most willing to accommodate growth? They could propose to city leaders, whether in Culver City, Beverly Hills, or Santa Monica, that if allowed to consolidate and develop defunct properties, such as old gas stations or record stores, into a 15-story building with 300 housing units, they would make concessions beneficial to the city as a whole.

The new Glaeser and Gyourko paper does a good job of describing the recent history. However, it does not discuss how a market economy adapts to anticipated challenges. The point of this Substack is to highlight the adaptation hypothesis, which explains how a vibrant economy responds to trends that are expected.

Suppose that real estate prices remain high in cities such as Atlanta and Dallas. What do young people lose from this price hike? What job opportunities and cultural opportunities do they lose if more of them end up living in a North Dakota? If these young people lose out on unique intellectual growth and entrepreneurship opportunities that are only available in these elite cities, then the costs could be high. In this scenario, the regulatory barriers could significantly impact young people’s future earnings prospects and their quality of life.

However, there are reasons to challenge that perspective. For instance, we have an economy with platforms like Airbnb and active air travel. Even if you live in North Dakota, where rents are low, you can travel affordably with airlines like Southwest to one of these major cities to experience culture and social interactions.

Thus, there are ways to utilize transportation to access urban hubs, even if you don’t live in proximity to them. Economists believe in diminishing returns to scale; if regulations in Atlanta force you to live in rural North Carolina, that area has its charms. As long as there is a sound transportation system, including regional air travel, you can still reach these urban hubs and benefit from them, even if you don’t stay there every night.

This illustrates how our economy adapts to emerging regulatory trends.