UCI Podcast: The economics of why work from home favors the suburbs

When you can work from home, you can work from anywhere. And that fact is having major implications for housing markets nationwide. Because of the pandemic-driven work from home policies, some people are ditching pricey cities for cheaper ones, while others are buying more space in the suburbs. What economic forces are driving the current upheaval in housing markets? And why might the pandemic lead to more suburban sprawl?

From the University of California, Irvine, I’m Aaron Orlowski. And you’re listening to the UCI Podcast. Today, I’m speaking with Jan Brueckner, a distinguished professor of economics at UCI.

Professor Bruckner, thank you for joining me today on the UCI podcast.

It’s a pleasure to be here.

So we’ve all read the stories about Bay Area tech workers who can now work remotely, and they’re fleeing San Francisco for cheaper digs in Boise. But I think it would be helpful for us to back up a little bit as we’re talking about this housing market. And I want to ask you why is housing so much more expensive in places like San Francisco and New York in the first place?

Well, there are two reasons. One is that those places are full of jobs that pay well. And why do the jobs pay well? It’s because the workers have high productivity in those jobs. The output, the product that’s being produced, is very valuable and so the workers are productive in the sense that they’re producing high valued output. The fact that incomes are high tends to raise the demand for everything in those cities, including housing. And so it helps to push housing prices up. The second reason is that places like San Francisco — and to a, perhaps, lesser extent New York City — have high amenities. San Francisco’s amenities are partly the scenery and the weather. But then there are a lot of other amenities like restaurants and shopping and so on that are excellent. New York’s weather is not as good, but it’s a fabulous, exciting place. Now people are willing to pay more to live in places with high amenities, and hence housing prices will go up as consumers compete for housing in those areas.

This calculus has changed a little bit with the advent of work-from-home policies because of the pandemic. And you actually recently had a working paper published with the National Bureau of Economic Research and your analysis of the data confirmed the stories that we’ve all heard about work-from-home policies convincing workers to relocate to cheaper cities. So what cities in your analysis, and what types of cities, have the most potential to lose people because of these work-from-home policies?

Well, what we found is that cities where productivity is high — worker productivity is high — and where jobs have a high work-from-home potential — in other words, the jobs are capable of being done remotely — the combination of those two things generates falling real estate prices in those cities. And the decline in prices was measured between 2019, the pre-COVID year, and 2020, the COVID year where work from home became more widespread. And so what our paper confirms indirectly is the notion that people are going to try to leave the expensive cities to live in cheaper places, while keeping their high productivity jobs. Notice that we’re not measuring population movements. We’re measuring the changes in real estate prices. So again, we find that prices go down in cities that have high productivity and high work-from-home potential jobs.

And then what types of cities have real estate prices that are rising?

Well it’s cities that are just the opposite, cities that have lower productivity jobs and perhaps lower work-from-home potential. But we’re mainly focusing on the sending cities. In other words, the cities where people are leaving,

What are a couple of the biggest sending cities that you found in the analysis?

Our analysis really doesn’t identify individual cities, but we know which cities are the ones with the high productivity, high work-from-home potential. For example, San Francisco is the premier city in that case. Washington, Boston, New York, Chicago, Minneapolis, Philadelphia — those are all cities with high work-from-home potential and high productivity jobs. Cities that are not in this category are McGowan, Texas, El Paso, Texas , Biloxi, Mississippi, Augusta, Georgia. So you see the difference, right.

Yeah. All those really expensive places that it costs a fortune just to rent an apartment. And maybe that’ll change now.

Well, yes. I mean, that’s the expectation that downward pressure on prices in these expensive places will be good for people who stay, who don’t leave.

Are there other reasons that workers might be relocating during the pandemic other than trying to find cheaper housing?

We didn’t talk about this in our paper, but some scholars who have commented on the paper say that, well, maybe people are leaving the cities because they want to get away from high densities in a COVID era. That’s possible, I think. But the fact that people are staying at home mostly during this period, kind of insulates them from the effects of density. So I’m not sure that’s a valid reason for people to leave, but it was suggested as a possibility to us.

Well, so we’re talking about a specific set of workers — people with white collar jobs that can be done via technology — and how those people moving from city to city and how the housing prices change as a result. But how does this shift affect low-income workers who can’t work remotely? What kind of difference do they see in their lives from these shifting housing prices?

Taken to an extreme, this phenomenon would tend to push down prices in the most expensive cities and for workers who remain in those cities — because they cannot work from home, they cannot work from other cities — those workers are going to benefit from lower real estate prices. By contrast this shifting of population away from the high productivity cities will raise prices elsewhere, and perhaps lead to losses for people who are already and remain in those cities. In other words, lower income people who are not moving.

At the beginning, you mentioned that one of the reasons for high housing prices in these more expensive cities is because of their productivity. But another reason is also the amenities, you know, the great views and weather in San Francisco and the great cultural life in New York.

Right.

So are you seeing evidence that workers are moving to places with greater amenities because they have this work-from-home flexibility?

That’s one of the possibilities that’s explored in our paper. In other words, one could move from a city with high work- from-home potential and low amenities to a city with nice amenities. And you could keep your job in the original city. The data does not confirm that type of movement. In other words, we’re not seeing price declines in cities with low amenities and high work-from-home potential. It’s not what we’re finding. But at the same time, the newspaper is full of stories about tech workers leaving the Bay Area and other high price places. But there aren’t any stories about people moving toward good amenities using their work-from-home option. So it’s kind of funny because our empirical results, which don’t show that happening, kind of match up with the absence of stories in the popular press. Maybe in the long run, it will happen. In other words, if this work-from-home phenomenon really gains hold and has staying power, we may see that.

We’ve talked a lot about how people are moving from city to city, but work from home has also changed the housing markets within cities, too. So I want to ask, first of all, why is housing more expensive in the city center than it is in distant suburbs, just generally speaking?

So that is a prediction of the standard mono-centric model of urban spatial structure that economists have developed over the last 50 years. And the logic is really simple. If you live in the suburbs, you’re spending a lot of time and money commuting to work every day, prior to the work-from-home era. And so you need to be compensated in some fashion for that extra expenditure, otherwise you wouldn’t do it. The compensation comes in the housing market. The housing market generates lower prices of real estate in the suburbs compared to the central city, as a compensating differential that reconciles people to longer commutes. Now, let me be specific in talking about this. It’s the price per square foot of housing that’s cheaper. That’s what the theory predicts. There may be bigger houses and they may be expensive overall, but they have lower price per square foot. So what we see — and this is universal around the world — is cheaper housing on a per square foot basis as you move away from the centers of cities, the employment centers, of cities.

And so that’s why it costs, you know, $4,000 to rent a studio apartment in Manhattan, but you can also spend the same amount of money for a palatial estate 50 miles away from the city.

Exactly. And the palatial estate obviously then has a much lower price per square foot.

Well, so what effect did work-from-home policies have on this housing market, within cities?

Our research also focused on that question. If you don’t have to go to work as often, then your commuting costs falls. In other words, if you live 20 miles from the employment center and you only go in one day a week, it’s going to cost you less in terms of money and time to do that, than if you’re going in every week. So commuting costs fall as a result of work from home. And what that means is that the suburbs now look more attractive. We already know the suburbs are cheaper on a per-square-foot basis, but now I can live there and I don’t have to endure the same commuting costs as I did before. So what that means is that there’s an incentive for people to move into the suburbs, to exploit the lower commuting cost, to benefit from them, to a greater extent than was true before.

And so what we expect to see then is this kind of population shift — people moving outward, which in turn will raise housing prices on a per-square-foot basis in the suburbs and push them down at locations closer to city centers where people are leaving. And so what that means is that the price gradient — which is the thing that measures how fast prices drop going into the suburbs — the gradient is going to shrink. It’s going to get smaller. In other words, prices don’t go down as fast moving into the suburbs under work from home as they did before. That’s the prediction. And so what we find is that prediction is upheld. Price gradients in our sample of cities across the U.S. got flatter during the pandemic year, the work-from-home year.

Could this flattening price gradient affect the types of homes that builders focus on building in the coming years? Could we have more suburbanization because of this?

Well, yeah, definitely. In other words, the prediction is that cities will spread out a bit and that builders will have an incentive to build more big houses in the suburbs to accommodate these people who are working from home and incurring low commuting costs. So that’s the prediction, more urban sprawl.

Could the work-from-home policies also help revive more rural towns? Does the gradient sort of drop off at a certain point once you get a certain distance from the city center?

Well, it’s true that rural towns could benefit. I mean, it could be that instead of moving to Boise, Idaho from San Francisco, somebody moves to Walnut Creek, or someplace like that, that’s in the distant suburbs of the Bay Area. So those suburbs would benefit. It’s almost like moving to a different city, but not quite, or maybe people would move to Fresno. I think there’s even some anecdotal evidence about that type of movement. It’s not as far away as Boise, but it’s still a different city.

Do you think that these changes will be permanent? Or is there a possibility that as businesses continue to come out of the pandemic and some work-from-home policies fade, could the housing markets essentially revert to their pre-pandemic trends?

It’s possible. And so that’s one of the big question marks in this whole area, is the extent to which work from home is going to remain in force. I think most people would agree that white collar workers with the ability to work remotely are probably going to spend fewer days in the office than they did before. I think nobody’s going to disagree with that. It’s coming to work once every two weeks or three times a week, as opposed to five times a week. It’s hard to say. So I think there’s no doubt about that. There is more doubt about whether this model of working from a different city is long lived. In other words, is that really going to happen? Is that a sustainable pattern in the long run?

And you know, there are various views on this. One view says, no companies are going to want their workers back for face-to-face contact. They just are not able to reap the benefits of interaction when people are remote — are fully remote — and never show up at work. So that’s one possibility. But then, you know, you read a lot of articles in the press about this, and you see the opposite statements that workers find themselves being more productive working remotely, and that there’s virtually no downside to doing so even from a different city. But now there are other angles on this question too. One is if a worker moves to a cheaper city, will the Silicon Valley company still pay them their high salary? Or will they say, look, you have a lower cost of living now, so we’re going to pay you less. If that happens, then this whole story is sort of out the window, right? Because then it’s not clear that there are benefits from relocating to a different city, if you’re going to pay a price in terms of salary.

But there’s a further thing that I think is really important, and that you don’t hear discussion about this all that much. Suppose that there’s a company hiring brand new employees. Is it possible that these employees are going to live 1,000 miles from the company’s work site? Well, I mean, you have to think about the question of how these employees would ever get integrated into the company. They will never actually see anybody face to face. They’ll never get to know their colleagues on a personal level. And so that’s a problem, for sure. It’s one thing to talk about workers who all know one another scattering all over the country and working from home. But it’s a different matter when you’re talking about brand-new workers who have no experience with the company. So that’s a problem too.

Well it sounds like the changes in the suburban price gradient are likely to be stickier than the other changes of workers going to distant housing markets — just with all of these other factors that you mentioned.

I think you’re right about that. I think that’s true. So, like I say, I think that the suburbanization force that work from home is going to generate is probably here to stay. Whether people are going to be really moving to other cities and staying there is another question.

So many people have been affected by these price fluctuations, with bidding wars in some cities and falling rents in others, and all these suburban changes that we’ve been talking about. So overall, do you think that these changes have been good for the housing market, and for people who are trying to find a place to live?

Let’s look at the second question. Are they beneficial for people, rather than for the housing market? I think the answer has to be yes, because if people are changing what they’re going to do, they must be making the change because it suits them. They like it better. So I think it’s clear that people are better off as a result of these work-from-home options. In terms of the housing market, I mean, whether it’s good or bad is sort of a complicated question. I mean, we’d all like housing prices to be low. So to the extent that they go down, that’s good, at least for people who are trying to buy or rent. For homeowners, it’s so good. Homeowners in San Francisco may think, well, wait a minute, you know, I’ve made tons of paper profits on my house, if now there’s downward pressure on prices in San Francisco, I’m not too happy about that. There are many different perspectives on this question.

But good for people who are making changes that positively benefit their lives.

Yes, I think so. You know, the work from home immigrants from places like San Francisco are giving something up, they’re giving up the amenities that they’re used. We have to think about that as well. These people are probably going to try to find a fairly nice place to move to. They’re not going to go and move to a place where there’s a huge amenity sacrifice relative to San Francisco. There’s always going to be an amenity sacrifice, but maybe they’ll try to limit it by going to Boise, which I understand is a nice place, although I’ve never been there. So that’s another thing to think about.

Professor Brueckner. Thank you for joining me today on the UCI Podcast.

It’s been fun. Thanks for the invitation.