Minneapolis 2040 Plan: An economic principle is being misused

The argument behind upzoning in the Minneapolis 2040 Comprehensive Plan is that if the quantity of housing units is increased by removing or relaxing building standards and allowing single-family teardowns to be replaced with duplexes, fourplexes and commercial buildings in neighborhoods currently zoned for single-family homes, the increase in supply will stabilize or reduce prices.

The problem is, quantity is not the same as supply. And we can be in the supply-and-demand business only if all housing units are identical, if buyers do not care which house they buy and if all houses sell for the exact same equilibrium market price.

And because none of that is true, we are not in the supply-and-demand business.

We are in the quantity business.

And one of the best examples of increasing the quantity of housing units and the population density in a city is the massive condominium complex recently completed in Wayzata. Did low-income and middle-income people rush to buy the new units, given that, without traffic, they are only 10 or 15 minutes from downtown? No. Because units start at $1 million each.

In the real world, developers build houses and condos that they think will give them the greatest profits, which does not mean the more they build, the lower the price.

In Minneapolis, builders have been tearing down single-family homes they buy for $350,000 to $400,000 and replacing them with million-dollar houses. Why? Because it's profitable. And when they do, the quantity of houses (or what the 2040 plan mistakenly calls supply) stays the same, but the price goes up. The teardown builders make profits while making the neighborhood even less affordable.

Am I saying house prices are not affected by the number available for sale and the number of buyers at any point in time? No. I am saying the price of any house is not the result of supply and demand determining an equilibrium market price. It's one house or housing unit at a time, sold by a builder or an owner, and the more buyers there are, and the more money buyers have, and the fewer houses there are for sale, and the lower mortgage rates are, the higher the negotiated price is likely to be. But that is not the same as the textbook idea of supply and demand, where all units are identical.

Finally, if a three-bedroom, two-bath single-family house is torn down and replaced by a building with four apartments or condos, and the price of each condo unit is less than the now-destroyed single-family home, can we say prices have fallen? Not if we want to be truthful, because we are talking about apples and oranges. The price of a condo unit that is smaller than the single-family house that was torn down and which, according to the 2040 plan, will have a smaller (and shared) yard and will not have off-street parking, cannot be compared to the price of the now-gone single-family house.

You are not getting the same thing for less money. You are getting something different for less money. And you can't use those numbers to say prices went down. We should also not fool ourselves, anyway, into thinking builders will buy houses for $400,000, tear them down and build fourplexes with units that sell for less than $200,000. Even if they could, they wouldn't want to, because that would mean giving up profits. The most likely outcome of upzoning is that single-family houses will be replaced with condo units that sell for more than the single-family houses that were torn down to build them.

All of which explains why upzoning is more likely to increase, not decrease, prices, and why it will not increase either affordable housing or diversity in upscale neighborhoods.