Economics / Technology

How Tech Could Impact the Local Housing Market

If one ever had to offer a summation of what makes a market thrive, many of those respondents would probably have their own individual ideas, but they will all probably revolve around the same concept: lots and lots of growth. Over the course of modern history, the growth of industry and the flourishing of bigger and brighter ideas have been the lynchpin for success in our highly capitalistic society. Over the last few decades, Pittsburgh has transformed itself from a ghost of a dying industry into a futuristic, high-tech powerhouse teeming at the brim with opportunity for those who are willing to dive in. That optimistic trend looks to continue into the near future, as tech employment has grown 12% in the last two years while the city can boast of having the fourth-largest tech labor pool among small markets. [1][2]

Pittsburgh contains even more opportunity, though, and it comes in the form of average housing prices that often fall far below what one would expect for such a high traffic area. Indeed, according to Zillow estimates, the average price of a home in Pittsburgh is $125,400, which falls below the nationwide average of $201,900, and, while the average nationwide growth rate clocks in at 6.9%, Pittsburgh’s growth rate hovers at 4.6%. This ostensibly makes Pittsburgh a great place for those who are either living on moderate income sources or just entering the job market to own an entry-level suburban home. It’s crazy to think that your mortgage can be lower than rent, but, in this town, that’s an everyday reality.

Of course, the housing market is always in flux, and scenarios are always changing, so why is this issue so important now, and what does tech have to do with anything in a market where numerous factors are always interacting? The answer possibly lies with Amazon’s plans for a new headquarters, with Pittsburgh as one of the main competitors along with fourteen other cities. This may not, at first, sound like much of a big deal. This is likely due to the fact that, over the years, Pittsburgh has seen companies like Google and Uber take residence. Therefore, the presence of another tech giant should just be a continuance of the status quo. However, there is an extra variable that makes this scenario more interesting in that the city that will be bestowed with the right to house Amazon’s second headquarters will be greeted with a whopping 50,000 new jobs. Of course, some of those jobs can naturally be filled by current residents, but, of course, many of those jobs will have to be filled by a massive influx of new habitants. [3]

So, when it comes to Pittsburgh, how much growth is good growth? Where is the line dividing opportunity and a scenario that prices middle-class families out of the market? Well, before any kind of conclusion can be drawn, it is important to put things into perspective. Namely, one should assess just how active Pittsburgh’s job market really is when compared to some others in order to get a sense of where the market is heading. If one were to do that, it would be apparent that, while Pittsburgh is still a tech hub, there are other metropolitan areas around the U.S. that are slightly ahead of the Steel City in terms of continuing growth of tech jobs.

According to Glassdoor, there are ten cities right now where tech jobs are increasing at a rate over that of other areas. Pittsburgh is not one of those cities; however, what is interesting in this case is how the housing trends in those cities compare to the national average. In all but one of the metro areas, the average home price exceeds the national average, and, in all but two metro areas, the year-to-year growth rate does so as well. In fact, Detroit, the area with the highest growth rate, is also the one previously mentioned as the area with below-average housing prices. [4] Now, of course, it would be irresponsible to claim that the entirety of this issue can be directly attributed to tech growth. A housing market can be influenced by a plethora of factors: interest rates, policies, and the overall growth of the economy, which obviously includes non-tech-related job growth.

However, there is also another critical area that can drive up housing prices, and, while it seems very simple in concept, there are key economic ideas that support this issue. This issue concerns the size of metropolitan area, and, to be clear, while one might traditionally address the size of a city by the number of people residing within it, this issue literally concerns geographical size. Of course, in economics, the theory of supply and demand is well known and understood, and its relation to how goods and services are priced is also well established. As one may know, if supply decreases while demand increases, prices will skyrocket. It is a tale as old as time, supported by miles and miles of research and evidence so laboriously conducted throughout the years.

So, what does size have to do with any of this? Well, while this may possibly be purely coincidental, the three cities listed in the Glassdoor article with the highest average home prices are also the three smallest in terms of square miles, according to U.S. Census data. [5] Those cities are, for referential purposes, San Francisco, Seattle, and Washington, D.C. Now, if one were to invoke economic theory into this issue, one would see why size is such a substantial factor. Even if one were to assume that new residential areas were to be constructed in these areas’ surrounding suburbs, there is a limit to how much can be built in one area. So, hypothetically, if the demand for labor and, subsequently, housing increases while supply cannot keep up at the same rate, it makes sense that housing prices go through the roof.

But, what does Pittsburgh have to do with any of this? Well, even though the Steel City’s tech market may not be growing as quickly as these other ten markets, it has been established that it is still growing. So, then, how does Pittsburgh’s size factor into this conversation? When one understands the pattern that has just been introduced, size becomes of utmost importance. While Pittsburgh does not have as many people as San Francisco, Washington, or Seattle, if one were to arbitrarily add Pittsburgh to that list of ten cities as a means of comparison, one would see that it joins the three previously mentioned cities as one of the four smallest cities as measured by square miles. And, if one were to assume a trend with this scenario, then, if Pittsburgh were to experience continuing tech market growth on a scale comparable to that of these other areas, then one could be looking at a situation where Pittsburgh’s housing market experiences an unprecedented boom especially when one considers the possibility of something entering the city with a large plan and a demand for educated labor like Amazon has.

Lawrenceville is currently one of Pittsburgh’s most in-demand neighborhoods. Photo courtesy of nextpittsburgh.com. 

However, there are some other consequences that need to be considered if something like this were to happen. Now, of course, continued growth would be a fantastic outcome. It would be great for investors and great for the city’s economy at large, but it would certainly risk harboring some negative factors. Seattle, which also stands as Amazon’s main corporate hub, is the one place where Pittsburgh can possibly see its own future reflection, for both good and bad reasons. While the Pacific Northwest tech haven has continually experienced enormous growth, it has also inherited some negative side effects. For example, as noted by real estate reporter Mike Rosenberg in a Reddit AMA, Seattle’s nation-leading price growth could lead to an average home price nearing $2 million by 2026. This would, therefore, lead the city to have to take on increased issues regarding unaffordable housing as well as zoning concerns that would redefine neighborhoods and add increased urban density, which Rosenberg notes can be directly attributed to Seattle’s smaller size in relation to larger metropolitan areas that, conversely, have the space to sprawl out. [6]

Yet, a more serious issue looms over this scenario: in Seattle, like in several other tech-boom cities, homelessness is on the rise. In fact, in some areas, it has risen close to the point of becoming a public health crisis. Now, homelessness has been a systemic problem of the course of modern history, but it is now amplified because housing prices have skyrocketed. So, because of this, those at the lower end of the income spectrum who might have been able to keep up with rising rates before the boom can no longer keep up, and it is creating a genuine crisis. [7] In fact, as Mike Rosenberg also noted in his AMA, even his dreams of owning a single-family home have been devastated, and, at the rate that Seattle’s housing market is going, he may be soon priced out of other options.

So, what if Pittsburgh is unable to keep up with the possible effects of the housing market changes? If the patterns align, and the Steel City’s market accelerates in a way similar to that on the West Coast, will our future look like the one shown above? As these are purely hypothetical questions and situations, it is nearly impossible to confirm any possibilities with definitive resolution. However, there are some aspects that can allow one to shine a light on the possible outcomes to this situation. For example, zoning issues in Pittsburgh could be difficult to work around, as they historically have been, and, while new residential areas are currently under construction within the city limits, the way in which the city is laid out begs the question of whether or not this solution is feasible in the long-term.

Now, of course, as has been mentioned before, home prices will increase as supply decreases, which, in theory, should be good for current homeowners, but here is some more food for thought to consider: not all neighborhoods are created equally. The market is a funny thing; one may assume that, because one aspect of an industry is moving in one way, everything else will follow. This is not always the case, and this becomes incredibly important when, again, one considers this: not all neighborhoods are created equally. Some neighborhoods in Pittsburgh are in higher demand than others, regardless of some factors such as affordability. For example, areas like Lawrenceville, Highland Park, and Brookline are on the rise while some other places like Penn Hills, Carrick, and Beltzhoover remain unchanged due to various factors such as inconvenience or fixer-upper issues. [8] This means that, even with the job growth, these neighborhoods are not moving. At the moment, that is great for potential first-time homeowners, but it might not be so great for current residents if they are increasingly priced out of other neighborhoods. A situation in which neighborhoods are further divided by income class might not be in everyone’s best interest.

On the other hand, if the markets in these neighborhoods begin to pick up, then it is the first-time homeowners who begin to suffer. At the beginning of this piece, I noted that housing affordability makes Pittsburgh a great place for those on middle-class income or who are just entering the job market. Like Seattle, that trend probably cannot sustain itself if the growth is too high. And, also, renting might not be an optimal solution either, if this were to be the case. Referring to the Amazon issue again, it is noted that, of all cities considered for the new headquarters, Pittsburgh is one of the ones most likely to have the sharpest increases in rent costs. [9] If one were to combine this with a possible surge in housing prices, it makes for a possible surge in overall residency costs for everybody. It bears remembering that, even in a high-tech world, not everyone is going to be part of this market. What happens to current renters, then, if this were the scenario is that they could be priced out of their apartments, which, again, can possibly fracture communities, create class divides between neighborhoods, and, yes, even lead to homelessness if renter incomes cannot keep up.

So, in the end, there are several different ways of looking at this, and none of these ways are mutually exclusive. A city like Seattle is a place with a lot of opportunity and a lot of problems, but it does not mean that their problems are not being addressed, and Pittsburgh should do the same thing by planning for the future. However, it is important to discuss the future one last time. In this piece, I have directly tied the possibility of large growth with Amazon’s new headquarters. So, then, what if there is no Amazon in Pittsburgh’s future? Does anything change about this scenario? Well, yes, obviously, in the short term, Pittsburgh will not see the kind of massive growth that Amazon’s HQ2 will bring to the region, but it must be noted that this will not be the end of the world. For example, what if UPMC’s newly announced plans for new, high-tech specialty hospitals result in a similar scope of growth? [10]

Also, all of the statistics and stories citing Pittsburgh’s current growth do not factor Amazon into the equation. The city’s tech market is still growing, and this discussion needs to be had because, in the end, growth is still good, but there are issues around it that need to be managed. If the negative examples illustrated in this story are adequately planned for, then it remains a possibility that a good majority of this city can thrive in the new market. Of course, one cannot simply cure the ailments of the market and society. That is a truly naïve concept to believe in because no plan is perfect, and some people will lose out anyway. Every choice has consequences; if the benefits outweigh the costs, you have to take a shot at those choices, but you still have to minimize those costs, especially when lives are affected. In the end, that’s what makes this issue so important to everyone within the city limits.

 

[1] http://www.post-gazette.com/business/tech-news/2017/07/26/startup-pittsburgh-tech-jobs-growth-cbre-group-study-best-small-tech-markets-us-momentum-market-madison-wisconsin/stories/201707240106

[2] https://www.cbre.us/about/media-center/pittsburgh-among-top-cities-for-tech-talent-growth

[3] http://www.chicagotribune.com/business/ct-biz-amazon-50000-workers-seattle-20171020-story.html

[4] https://www.cnbc.com/2017/07/27/tech-jobs-silicon-valley.html

[5] https://www2.census.gov/geo/docs/maps-data/data/gazetteer/2016_Gazetteer/

[6] https://www.seattletimes.com/business/real-estate/seattles-crazy-housing-market-answers-to-your-questions-on-record-high-rent-zooming-home-prices-and-more/

[7] http://www.sfgate.com/news/article/Homeless-explosion-on-West-Coast-pushing-cities-12334291.php

[8] http://www.post-gazette.com/business/money/2017/02/27/House-prices-rise-above-average-in-three-city-neighborhoods/stories/201702260031

[9] https://www.curbed.com/2017/10/19/16502988/amazon-hq2-bid-rent-apartment-housing

[10] http://www.post-gazette.com/business/healthcare-business/2017/11/03/upmc-2-billion-hospitals-highmark-allegheny-health-network-vision-cancer-transplant-heart-rehab/stories/201711030169

Amazon Photo: https://www.buffalorising.com/2017/09/amazons-hq2-is-a-golden-opportunity-for-the-heartland/

Lawrenceville Photo: https://www.nextpittsburgh.com/city-design/artist-dan-kitchener/

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