Back in Part 2, I wrote that the success of an inclusionary housing ordinance should be framed by how it influences the overall housing market. But that begs the question: what is the “overall housing market”?

If you were to look at the analysis prepared by Keyser Marston Associates (KMA) for the City of Costa Mesa, you certainly would be under the impression that the housing market is defined by the city limits of any jurisdiction. The analysis presented in KMA’s financial evaluation is a deep, deep dive into hyper-local economic factors, such as the value of the land, sites available for development and the “supportable densities” in various Costa Mesa neighborhoods. Additionally, KMA compares its results and recommendations to other cities’ ordinances, further emphasizing the view that each city forms its housing market based on its local rules and regulations.

Unfortunately that framing is probably wrong. And that’s because the housing market isn’t defined by arbitrary city boundary lines; it is defined by the labor market, which is further defined by transportation and mobility options as well as the location of jobs and services. And that is because a great labor market, rather than the housing market, is what make cities well, cities.

In one of my favorite urban planning books of all time, Order without Design: How Markets Shape Cities, author Alain Bertaud explains this point beautifully. “Cities,” he writes,

are primarily labor markets… without a functioning labor market, there is no city… While most cities offer a lot more than job opportunities, it is important to recognize that the expansion of job markets makes everything possible. A well-functioning labor market brings together people with varied but complementary knowledge and skills – the precondition for innovation. A well-functioning labor market makes possible every other urban attraction – symphonic orchestra, museums, art galleries, public libraries, well-designed public spaces, and great restaurants, among many others. In turn these typically urban amenities require additional specialized jobs and attract an even more diverse population, which becomes the source of future innovations and a more interesting urban life.

Order without Design, pp. 19-20

If cities are defined by their labor markets, what does this mean for housing? Well, think about the time you were last looking for a job. Did you limit your job hunt to places you could reach from your current residence? Or, especially when you were young and unattached, did you seek out the right job first, and then try to find housing that was close enough to that job and within your price range? Another way to think about it is to look at it from the employer’s point of view. If you were an employer, would you care whether your prospective employee lived in Santa Ana, Huntington Beach, Costa Mesa or Irvine? So long as they have reliable transportation, most employers will happily hire employees regardless of which city they live in.

Unfortunately, California believes in, and is perpetually stuck in, the opposite assumption: that people decide where to live first, and then settle for jobs that are in close proximity to their homes. This is what have given rise to the so-called “urban village” model, where urban planners believe they can, through careful planning and land management, create job centers and then cluster homes around them. Unfortunately, as Bertaud disappointingly explains, “this model only exists in the mind of urban planners”:

This model does not exist in the real world, because it contradicts the economic justification of large cities: the efficiency of large labor markets. Employers do not select their employees based on their places of residence; neither do specialized workers select their jobs based on proximity to their residences.

The urban village model implies a systematic fragmentation of labor markets in a large metropolis and does not make economic sense in the real world.

Order without Design, p. 40

Let’s say it again for those in the back: the urban village model does not exist in the real world. THE URBAN VILLAGE MODEL DOES NOT EXIST IN THE REAL WORLD.

So here’s the big takeaway: the housing market that we are dealing with is NOT the housing that is located just in the City of Costa Mesa. It is the housing that is located in the labor market for Costa Mesa’s jobs and the jobs located in our surrounding cities. So assuming that most people commute by car, the “housing market” would be the geographical area that can reach our job centers within a reasonable commute (let’s say a 30-45 minute drive, including traffic, each way). That would reach deep into Huntington Beach, Fountain Valley, Tustin, Orange, Irvine, Santa Ana, and Newport Beach.

So what does that mean for our inclusionary housing ordinance? Well, it still means that overall supply in the entire market, but especially supply that is geographically closer to job centers, is the key to addressing our affordability crisis. But it also means that we must pay careful attention to the constraints placed on development by our neighbors. Developers intuitively understand that housing markets are labor markets, and therefore (no matter what they say in Planning Commission presentations) they are emotionally indifferent to building in any particular city. Rather, so long as two developable parcels have the same access to job centers, they are going to choose to build on the parcel with the most attractive construction and regulatory costs.

In Part 4, I’ll return to the literature on the effects of inclusionary housing ordinances and how we can interpret its findings if we believe that housing markets are really labor markets. This will help us evaluate the proposal by Staff going to the Planning Commission on Monday.