Myths and Realities About Cycles: Avoiding the Inevitability Trap

About a year ago I wrote a post about Paul Krugman and whether building luxury housing could mitigate the effects of gentrification. For whatever reason, I just noticed one of the comments on that post, which in turn prompted me to think about a very different question. The reader wrote that “the author is completely ignorant of the housing cycle. As time goes on, the luxury condos tend to pass down the economic chain to become condos for the middle class, then the lower-middle class, and then back up the economic chain again.” Leaving aside the writer’s condescending rudeness, which reflects more on him than on the subject of his criticism, his observation is utterly fatuous. But be that as it may, he raises an important point. As human beings, we are constantly attuned to cycles in nature. The sun and moon rise and set, the tides rise and fall, the seasons go and come back. Perhaps that explains our desire to impose a cyclic order on social and economic phenomena, but we’ve been doing it for a long time. In 1959, two of the most prominent urban economists of the time, Edgar (not J. Edgar!) Hoover and Raymond Vernon, offered their take on the “neighborhood life cycle”:

Stage 1: Single-family residential development.

Stage 2: Transition to higher density, apartment construction.

Stage 3: Downgrading to accommodate higher density through conversion and overcrowding of existing structures, spread of ethnic and minority districts.

Stage 4: Thinning-out or “shrinkage” characterized by population loss and decline in housing units.

Stage 5: Renewal through public intervention, redevelopment and replacement of obsolete housing with new multifamily apartments.

In 1975, HUD asked the Real Estate Research Corporation (RERC) to take a fresh look at the cycle. RERC was more pessimistic, as reflected in its version: