Thursday, January 29, 2015

Housing Preference Doesn't Matter When You Can't Afford to Live Where You Prefer

Living in the suburbs vs the city isn't as simple as choosing which you prefer and moving there.
The Reason Foundation's Robert Poole has brought up the issue of housing choice in a transportation news update last week, arguing, yet again, that the media is exaggerating the Millennial preference for urban housing. His evidence includes an analysis by the notoriously biased (and regularly debunked) Wendell Cox in addition to data from a mysterious survey that I can't even track down, but since some people take these guys seriously, I'll take a little time to address the logical fallacy underlying their arguments: namely, that where people currently live is the best measure of where people actually prefer to live.

The way Mr. Poole sees things, because more Millennials live in suburban housing today than did 15 years ago, suburban housing is clearly their preferred housing type. There are a few problems with this view, and the most important is that it ignores the reality of prices and affordability — Millennials (and others) may prefer to live in urban communities, but if they can't afford to do so, their preferences are largely irrelevant.

And because the age group he's looking at is young and at the beginning their careers, many Millennials are especially sensitive to price beyond a relatively low threshold. In quite a few of the most thriving U.S. cities, housing in the urban core is affordable to only a very small subset of under-30 residents: those that earn much more than the average 20-something, and those that are willing to pile into small units with multiple roommates. The remainder of the Millennial cohort, many of whom might prefer a downtown loft to a suburban garden-style apartment or shared single-family home, if they could afford it, are not so much expressing their highest preference as being driven by the necessity to find a place they can afford. Price is a far better measure of the demand for urban housing, and it's price that explains why Millennials are so often unable to afford living in the city. Any assessment of preference that doesn't consider affordability is inherently flawed.

A site adjacent to Beacon Hill Station in Seattle left vacant
due to poor planning following a major light rail investment.
Another important consideration is whether the housing that's built corresponds to the housing that's most desired. A big part of the problem is that, despite strong demand for more walkable, urban housing, that's not the type of housing being built: I estimate a shortage of at least 8 million walkable housing units in the U.S., a deficit that will take decades to cure at current multifamily construction rates.

This again comes back to affordability, as well as regulation: It's much easier and much cheaper to build low-density housing in areas where demand isn't quite as high, land costs are considerably lower, and regulations that limit development tend to be much more lax. Most people will settle for suburban housing when they can't afford the urban housing they prefer, so these non-ideal units still get snapped up. But that's not an expression of preference for suburban housing, that's an expression of preference for not being homeless.

I don't mean for this to be an excuse for the flawed system of development that typifies most coastal cities. Matthew Yglesias writes that housing affordability is Blue America's greatest failing, and I agree. This is simply an acknowledgement that people need a place to live, and when it's illegal or fiscally impractical to build homes for them in one place, developers will build those homes somewhere else — to the detriment of our overall quality of life, health, safety, and environment.

Poole, an unabashedly pro-oil, pro-car advocate, concludes his post lamenting the "wishful thinking" of urban planners who build extensive transit infrastructure even as people continue to choose suburban, car-dependent lifestyles. He's correct that urban planners and other city leaders have fallen prey to wishful thinking, but not in the way he implies. Their failing is in thinking that transit investments alone would create the multimodal, sustainable communities we seek — particularly when those investments continue to defer to cars at the expense of transit users.

Many cities, Los Angeles and Seattle included, have committed to massive expenditures on new bus and rail infrastructure, but few have been nearly so bold in regard to housing development. This has worked out nicely for the relatively few residents that are able to secure income-restricted housing near transit, those that can afford units in the small number of new transit-oriented developments, and especially for those that owned property near stations before they were built. For most everyone else the impact has been sadly limited, and it should be no surprise that as Millennials begin to form their own households, they're choosing to live where new homes are actually being built.

Saturday, January 3, 2015

California Cap-and-Trade Drives Up Gas Prices... By About 3 Cents... Maybe...

California's cap-and-trade program now covers gasoline, and — surprise! — it looks like the doomsayers were wrong. State Republican lawmakers (and even some Democrats) recently tried to delay or exempt gas from the cap-and-trade program, arguing that California residents can't afford more expensive fuel, but they couldn't have picked a worse time for the fight: the update to the law took effect on January 1st, after a six-month period in which national prices took a 50 percent nose dive. This chart sums up the new tax's impact nicely:

Fear the tail!
Since the new year, prices have gone up by about 3 cents. Ahhh!!! This compares favorably to apocalyptic predictions from the California Driver's Alliance, which claimed that prices would increase from 16 to 76 cents a gallon. Actual experts have estimated that the cap-and-trade program will increase gas costs by about $0.10 per gallon in the long run, and it's still very early, so we'll see.

As an admitted amateur in the field of gas price prediction (though with a much better record than several former presidential nominees), I'm not going to pull a Reason and pretend that three days is enough time to fully adjust to this new reality. At the very least, though, it's reasonable to assume that the carbon tax is responsible for the small bump over the past few days.


Well, I got a little curious and looked at the same chart for some other states, it turns out that California's not the only state with a slight bump since the new year. Here are a few other states (and D.C.) with similar increases:

Washington State
New York
Washington, D.C.
There were also many states whose gas prices continued to slide since the 1st of the month, and even more where prices held steady, so none of this is to say that the cap-and-trade program won't result in persistently higher prices, even if the impact is slight. Maybe it just means we shouldn't jump to conclusions too quickly. Gasoline is still essential for many, many Americans, and if oil companies want to pass along the increased cost to consumers there's very little to stop them — that is, until more viable alternatives to driving are available. 

It's also important to remember that, while driving remains non-negotiable for millions of Californians today, the proceeds of the cap-and-trade program are primarily dedicated to funding projects that reduce the need for car dependence and decrease carbon emissions in the process. More than half of revenues — which are expected to reach at least $3 billion annually — will be spent on clean, energy-efficient transportation and sustainable, affordable housing. Over time, the fortunes of far fewer residents will be tethered to the price of gas; by then, hopefully, I can start sharing charts about improving environmental quality rather than a three-cent bump in gas prices.

Thursday, January 1, 2015

Maybe Uber Should Just Provide Its Own Insurance to Drivers

One of the criticisms of Uber and other ridesharing companies has been that part of the reason they've been so successful is that they've foisted the cost of insurance onto drivers. Insurance companies don't like it when you use your car as for-hire transportation unless you're insured to do so, and that insurance is considerably more expensive. As a result, many drivers have been driving with inadequate insurance, which puts both their passengers and themselves at risk. The "insurance gap" — the time between when a driver logs into Uber and when they actually are dispatched to a customer — has been especially problematic.

Part of the problem is that, thus far, there aren't really hybrid insurance policies that account for drivers who use their cars for-hire some times, and for personal use during other times. This is being worked out to some degree, at least in California and perhaps elsewhere, but it seems like a relatively simple solution would be for Uber to just offer the insurance product themselves. The market isn't supplying them with what they need, so maybe it's time to live up to their innovative name and fill the gap themselves.

Perhaps this is too much of a diversification of interests for Uber, but compared to all the other issues facing Uber right now, this seems like a relatively easy fix. They've already got many of the essential parts in place. For one, no one knows better than them how often their drivers are getting into accidents, so setting their premiums should be fairly simple. They also have direct access to the data on how many hours of the week their drivers are on the job, so the hybrid rate can be perfectly calibrated, individually, to the number of hours of regular driving versus for-hire driving. They can ensure that their drivers are always fully insured by having the premiums deducted from their drivers' paychecks. Last, and perhaps most importantly, Uber is so large that they probably have enough drivers to pool their risk safely.

Uber's too big at this point to be acting like the brash upstart. It's solved some serious problems for urban residents like myself, for which I'm extremely grateful, but it's time to grow up and start addressing some of the problems it's created as well. If Uber's really interested in having their employees and passengers fully covered and "In Good Hands™," as it were, and if the market isn't providing the coverage necessary to ensure that peace of mind, Uber should just go it on its own. With a recent valuation at $40 billion they can certainly afford it, and they could even earn a small additional profit in the process. Their public image is in tatters right now, and if this will help put them on better terms with their critics, it's probably worth the headache.

Thursday, December 18, 2014

Hotels Make Los Angeles Way More Money Than New Housing, Even After Big Subsidies

I've got a new post up at the Urban One blog, this one addressing the controversial subsidies intended to attract more hotel development to the area around Downtown LA's convention center. Click here to see the full post.

A lot of the arguments in favor of the subsidies have focused on the need for more hotel rooms in a downtown that is relatively hotel-poor — it has fewer than half as many rooms within walking distance of its convention center as competitive cities like San Diego, San Francisco, and Las Vegas.

My interest, in comparison, was with the direct financial benefits, focusing on an often-overlooked (and huge) source of revenue known as the "transient occupancy tax," colloquially known as the hotel tax or bed tax. What I found is that, in lieu of public assistance, a hotel development that recently began construction is expected to produce more than five times as much city revenue over a 25-year period as a comparable condo project. Even after the subsidies used to encourage the developer to build a hotel instead of more residential, the city comes out ahead by about $70 million compared to the condo building.

See below for a few charts from the post, and be sure to follow the link to Urban One's blog to get the full story.

Tuesday, December 2, 2014

California High Speed Rail Could Earn the State Over $40 Billion in Profit

Earlier this year I argued that the up-front cost of local transportation projects, like light rail and bus rapid transit, aren't really comparable to the cost of California's high speed rail system. While all of these investments are fighting for the same dollars to some degree, their long-term balance sheets look very different: Local transit typically requires a persistent operating subsidy, whereas even the low-ridership estimates for high speed rail forecast a consistent operating profit. As a result, longer time horizons favor high speed rail, as profits gradually eat away at the high initial capital costs required to build out the network.

Unfortunately, the existing literature on California's high speed rail project doesn't take the long view. The official source for HSR's cost, revenue, and ridership projections – the California High Speed Rail Authority's 2014 Business Plan – limits its analysis to a 35-year operational period, from approximately 2025 to 2060. Much of the rail infrastructure, however, including some of the most expensive aspects of the project such as tunnels, viaducts, and bridges, have 100-year lifespans. Other up-front costs, such as for right-of-way acquisition, will only require a single, one-time payment.

Given this reality, what we need is an analysis that accounts for a more complete utilization of assets – an analysis that can fully amortize the high up-front capital costs over their useful lifetimes and most accurately determine the extent to which California HSR revenues can cover not just operational costs, but also those of capital. The analysis below will look at costs and revenue over a full 100-year period, at which point even the longest-lasting rail infrastructure will require full replacement. The spreadsheet analysis on which this is based can be found here. (Note that this analysis is ultimately just a simple extrapolation, unmindful of whatever technical constraints official analysts are required to work within.)

It's not my intent that the project live or die by its economics, any more than a bikeway or subway line (or a highway) should be discarded just because it doesn't earn money. High speed rail has countless side benefits, including improved connections between California’s major cities, reduced emissions in the heavily-polluted Central Valley and reduced air and road congestion throughout the state, job creation, more sustainable growth near stations, preservation of valuable agricultural land, and reduced car dependence. All of these benefits have been reported at length by writers like James Fallows and Robert Cruickshank, and they're all important to the final “go/no-go” determination. The purpose here is to expand our perspective beyond the social, environmental, and mobility impacts of this project, to include the potential for long-term, direct fiscal benefits as well.

So, let's get started.


The California high speed rail project's current capital cost estimate is $54.9 billion (all values reported here will be in 2013 dollars), contingent upon a variety of factors that haven't yet been finalized, including whether the system will travel underground through the Angeles National Forest, or take a cheaper (but more circuitous) route between Palmdale and Los Angeles.

It's fair to question whether the state and its contractors will be able to hold to this estimate. In an analysis of 258 mega-projects around the world, researcher Bent Flyvbjerg found that 9 out of 10 came in over budget, with an average cost overrun of 28 percent. But, as the chairman of the CA HSR Authority has himself noted, their team has put the project through an extremely rigorous risk assessment/management program, and it's unlikely that any project in the country has undergone more outside scrutiny. In lieu of credible alternative estimates, we'll have to take the word of the Authority and the independent panel of experts that oversee their work.


The estimated annual revenues from the 2014 Business Plan, for select years through 2060, are shown below:

These numbers represent only farebox revenue, i.e., revenue from ticket sales; ancillary revenue sources such as advertising, concessions, and real estate interests are not included. After 2035, ridership, and therefore revenue, is expected to have reached 100% of its current potential – growth that follows is presumably the result of other factors, such as increased demand for travel and population growth. For this analysis we will use the Medium Ridership scenario, which corresponds to roughly the 50th percentile of potential ridership outcomes. The forecast assumes 5.1 percent growth over each five-year period through 2060 (about one percent per year).* Extrapolating this to the year 2125, farebox revenue is anticipated to total $3.849 billion ($3,849 million) in 2125.

Under this ridership scenario, cumulative revenue for years 2025 through 2125 is $240.7 billion. Ancillary revenue sources in other high speed rail markets have added 2 to 30 percent over and above farebox revenues, and it is conservatively estimated here that CAHSR will produce ancillary incomes of 5 percent above farebox. This brings cumulative revenues to $252.8 billion by the year 2125.


Operating costs represent the cost of running the high speed rail system, including labor, electricity, and general maintenance required to maintain a state of good repair for vehicles, tracks and track structures, stations, etc. It does not include the cost of major rehabilitation or replacement of capital resources, due either to significant unaccounted-for breakdowns or resources reaching the ends of their useful lives. These costs are accounted for in the “Lifecycle Costs” section of this analysis, found further below.

The estimated annual operations and maintenance costs from the 2014 Business Plan, for select years through 2060, are shown below:

As with revenues, we'll assume the Medium Cost scenario for this analysis. The forecast assumes 2.0 percent operations and maintenance cost growth over each five-year period (0.4 percent per year) through 2060.* Extrapolating this to the year 2125, O&M costs are anticipated to total $1.225 billion ($1,225 million) in 2125.

Under this scenario, cumulative operations and maintenance costs for years 2025 through 2125 are $100.2 billion by the year 2125.


Lifecycle costs are those costs not covered under operations and maintenance, that include major rehabilitation and replacement of system infrastructure such as tracks, stations, tunnels, etc. Using the Business Plan's “50-Year Lifecycle Capital Cost Model Documentation,” which describes the expected lifetime of all capital assets, anticipated rehabilitation schedules and costs, and replacement costs, I was able to extend this analysis to the year 2125. Where capital asset rehab and replacement costs are listed as a percentage of initial capital costs, values were taken from Exhibit 3.4 in the Business Plan.

Total lifecycle costs over this time period come to approximately $56.3 billion. This is almost certainly a conservative estimate, as the lifecycle costs through 2060 total $8.6 billion, a 22 percent premium over Business Plan estimates. (The Business Plan estimates a cumulative lifecycle cost of $7.0 billion by 2060.)

Because the 50-Year Lifecycle documentation provides limited line-item detail, and some longer-lived infrastructure lacked detailed rehabilitation and replacement cost estimates, various simplifying assumptions were made that tended to overestimate likely costs.**


Below is a summary of these results, including additional sensitivity analysis to account for potentially slower increases in revenue growth, faster increases in costs, or both. Under the baseline circumstances described above, the state of California could realize a long-term profit of approximately $41 billion:

The low revenue scenario assumes slower revenue growth after 2060, with increases of just 2 percent, rather than 5.1 percent, every five years. The high cost scenario assumes faster O&M cost growth, with increases of 5 percent, rather than 2 percent, every five years. The Low Revenue, High Cost scenario combines these two scenarios. As you can see, only under the latter scenario does the state lose money, and even then it amounts to a loss of just $109 million per year – still enough to pay off the vast majority of capital costs. Compare this to what we would spend expanding our airports and roadway network in response to the state's population growth and increased demand for intra-state travel, and even a slight loss on high speed rail looks pretty appealing.

This is, of course, far from the last word on the California high speed rail project's economics. Numerous other scenarios are possible, including higher up-front capital costs, systemically lower ridership, or higher operations costs. This also doesn't take into account the likelihood of private partnerships and financing costs, which will almost certainly divert some profits away from the state. That said, there’s no reason to believe things couldn't actually turn out better for the state – these are just median projections, after all. We've certainly been surprised by above-average ridership on local transit throughout the country, from Seattle to Tucson to LA itself. Looking this far into the future, it's impossible to know exactly how things will shake out.

In the end, the point is that we're not building a high speed rail network for 35 years of use. It's a much longer-term investment in California's future that could be in operation for a century or more. The project's benefits are to be enjoyed by residents and visitors to California throughout that period – not just fiscal benefits, but environmental, mobility, health, and social – so we should take care to examine its costs over the same timeline.

*Note that, because all values are reported in 2013 dollars, inflation will result in higher cost and revenue growth in nominal terms.

**Some simplifying assumptions for the lifecycle cost estimate:

  • The project is completed in phases from 2022 to 2028, but this analysis averages these phases out, assuming the capital lifecycle clock starts ticking in 2025.
  • Capital equipment in “Category 30 – Support Facilities, Yards, Shops, Administration Buildings” did not provide rehabilitation costs as a share of total up-front capital costs for that category (example: total capital costs for the category were $779 million; rehabbing the overhead catenary might cost 2% of that total), rehabilitation schedules varied between 20 and 30 years, and lifespans tended to meet or exceed 50 years. To simplify, it was assumed that all components in this category would be rehabilitated after 20 years at 100% of initial capital costs, rehabbed again 20 years later at 50% of initial capital costs, and replaced 10 years later at 100% of initial capital costs. 
  • Similar assumptions were made for categories 50 and 60.
  • It was assumed that the number of train sets would increase by 50 percent in 2085 and double by 2115.
  • Pedestrian, bicycle, car, and bus access (including roads) rehab and replacement data was not provided in the 50-Year Lifecycle documentation, so it was very conservatively estimated that this would cost $500 million. With rehabilitation every 10 years and replacement every 50 years, this alone added $3 billion to the 100-year lifecycle costs for the project.

Saturday, November 22, 2014

VIDEO: How to Maximize Parking Productivity in the City

Providing enough space for everyone who wants to park their cars in the city is expensive -- upwards of $50,000 per space for some underground garages. It drives up the cost of housing and commercial space, forces non-drivers to subsidize car owners, and results in ugly architecture that dedicates lots of space to parking that will probably go to waste in the coming decades.

To fix this, we could limit the amount of parking we build, encourage car- and ride-sharing technologies like Zipcar and Uber, and increase the convenience and safety of transit, walking, and bicycling.

Or we could all just learn to park like this guy, and cut our parking requirements in half by tomorrow:

Tuesday, November 11, 2014

A Few New Posts On Los Angeles Housing Supply

Tokyo has kept housing prices under control by building much faster than population growth; LA is more in line with slow-growth, high-cost cities like London and New York.
I've written a few posts at my employer's blog in the past few weeks, focusing on the 2014 Casden Multifamily report for the Southern California region, and Mayor Garcetti's proposal to build 100,000 new homes by 2021. Click the links below to read the full stories:

Los Angeles Housing Supply Must Grow, Quickly, to Keep Prices Under Control

Despite a recent "boom" in housing construction, the Los Angeles housing supply must grow much faster in order to stay affordable to future residents.

Read more here.


How Los Angeles Can Build 100,000 New Homes by 2021

LA must take a multi-pronged approach to tackling the affordable housing crisis, increasing funding while easing the path for more private development.