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Urban Living Becomes a Luxury Good

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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After World War II, the economic center of gravity in the U.S. began shifting from the cities to the suburbs -- and that shift continued for more than a half-century. In the past few years, though, there’s been lots of talk about the trend reversing.

What does the evidence show? Well, it can be a little confusing.

Here, for example, is the result of City Observatory’s latest crunching of data (just out this morning) on job growth within and outside of U.S. downtowns:

The last time the Portland, Oregon, urban-policy think tank crunched these numbers, with data through 2011, it looked as if they might signal a really big shift.  As you can see in the above chart, job growth in city centers substantially trailed growth in the periphery during the last economic expansion (and presumably for decades before then). During and after the 2007-2009 recession, though, city centers added jobs at a faster pace than suburbs -- although growth was pretty slow in both.

Since 2011, overall growth has been strong and the periphery has regained its lead. Only barely, though. Something has changed in the urban-suburban relationship, but the suburbs sure aren’t going away.

Two recent studies give a sense of the dynamics at work. In November, Economists Lena Edlund, Cecilia Machado and Maria Micaela Sviatschi found that the relationship between housing prices and distance from the city center had flipped between 1980 and 2010: In 1980 housing generally was more expensive  farther from downtown; by 2000 it was more expensive closer in. In March, real estate economist Jed Kolko reported that the share of Americans living in suburban neighborhoods has continued to grow.

These two phenomena -- increasing urban real estate prices and increasing suburbanization of the population -- appear to be connected. Kolko found that Americans in the top income deciles were much more likely to live in urban neighborhoods in 2014 than in 2000, while those in the bottom income deciles were much less likely to. The shift toward urban living was also most pronounced among whites, the highly educated and the 34 to 49 age cohort.

Basically, urban life is becoming a luxury good in much of the U.S., in part because there isn’t enough of it to go around. Writes City Observatory’s Daniel Hertz:

In many places, the growth of demand for living and working in city centers has outstripped the growth of actual room for people to live and work in urban environments. This may be a result of some combination of a slowness of market actors to respond to demand; physical constraints on the growth of living and working space; or regulatory constraints on that growth. This dynamic has produced a shortage of cities -- demand for real estate in these central cities exceeds supply, driving up prices, excluding those who cannot afford them, and slowing the growth of these in-demand urban cores.

An obvious remedy, and one that has been a recurring theme of this column, would be to put up a lot more buildings in or near city centers. But that is, as Hertz notes, often hard to do. Urban housing and office space are likely to remain scarce, and the U.S. will stay a majority-suburban nation for many years to come.

  1. The percentages for 2002-2007 and 2007-2011 in that report are different from those in the above chart for reasons discussed in great detail in the new City Observatory post.

  2. This wasnt true for the first two or three miles outside downtown in 1980; prices fell to that distance, then began rising as one moved farther out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net