Why more Porsches means cheaper Priuses

Why more Porsches means cheaper Priuses

Housing supply, again

Matthew Yglesias

Aug 18

Beverly Hills is a famously wealthy, famously expensive town that has great local amenities, including very pleasant weather that facilities a low-emissions lifestyle.

In other words, it’s exactly the kind of place that a wise state government would rezone for higher-density housing. If there is a plot of land in Beverly Hills that is zoned for residential use, there really shouldn’t be a limit on how many people can live there. If you want to split a big parcel up into two modest-sized single-family homes, that should be legal. If you want to do duplexes, that should be legal. If you want a row of attached townhomes, that should be legal. If you want to do big-ass apartment towers, that should be legal. A huge expansion of housing options in Beverly Hills would be good for the economy of California, and good for the country.

Of course, if nonprofit developers want to build subsidized “affordable” units in Beverly Hills, that’s great. If the government of Beverly Hills wants to subsidize the construction of such units, that’s great. But the critical thing is that the permitting system should allow for lots of construction — construction that in the real world will mostly be market rate.

Beverly Hills is also home to one of the great characters of our confused era, John Mirisch, a City Council member in a super-rich exclave of Los Angeles who opposes California zoning reform from a left-wing, anti-market perspective. And I was glad to see him recently put forward an analogy to the automobile market because I’ve been meaning for a while to talk about recent automotive craziness as an analogy for housing.

Twitter avatar for @JohnMirisch

John Mirisch 

@JohnMirisch

It’ll never not be insane to me that there really are people out there who think that building more Porsches will really reduce the price of Priuses or that if people want Impossible burgers producing more meat is the “solution.” 

Jordan Grimes 🚰 @cafedujord

It'll never not be insane to me that there really are people out there who just straight up do not believe supply and demand applies to housing https://t.co/kzGxeQgzMF

August 13th 2021

3 Retweets25 Likes

I think that Mirisch is clearly wrong here. Even though normal people don’t buy Porsches, the supply of Porsches is clearly relevant to the question of overall car availability. More precisely, if you put severe quantitative limits on car production, that would skew new cars toward upscale luxury brands. Then, if having done that, you allowed for marginally more car production, the production would be of upscale luxury cars. But the new cars would still impact overall car affordability.

The markets are linked.

Totally segmented markets are rare

Mirisch’s burger example makes more sense.

Let’s say you’re a vegan and you want to get some Impossible patties to grill. But the store is out. Well increasing the supply of beef doesn’t help you here, because the point is you’re a vegan as a matter of strong ethical commitment. You are not going to purchase a pile of animal flesh just because they are out of Impossible Burger. You’d buy Beyond Burger, obviously. And maybe consider some kind of frozen veggie patty. But meat is not going to do it for you, you are shopping in the vegan market that is totally segmented from the market for meat.

This is a real thing that happens, and it’s often invoked in the housing context via the concept of “submarkets.” The idea is that the new luxury condos going up in a booming city like Austin exist in a totally different universe from the modest rentals used by the city’s working-class people of color. So rezoning for more multifamily construction is like bringing beef to an Impossible Burger shortage.

But I think you need to check the phrasing here. It says “if people want Impossible burgers.”

To generate the strong market segmentation theory, though, you need to posit that these are people with a strong ethical commitment to veganism. The premise, then, would be that Impossible is looking at the existing market of American vegans and hoping to sell them burgers. But that’s actually not what Impossible is trying to do. They are trying to look at the much larger population of Americans who are not vegans but who have some qualms about the ethics of eating animals. People like me, in other words. I eat meat. But I eat less meat than I used to. And one reason I eat less meat than I used to is that when I cook burgers at home, I now normally cook Impossible burgers.

In fact, a couple of weeks ago I was at H-E-B shopping for Impossible burgers to cook for my family and my in-laws, and I briefly thought the store was out of them. Had that been the case, I would have bought beef since none of us are in fact strict vegans — we’re just trying to be better people. But then I found the Impossible burgers and that’s what we ate.

These are not perfect substitutes for each other, but there is a margin of substitution. And the relative supply factors matter. If there are no Impossible burgers around, some of the people who eat them will eat meat instead. If the price of beef tripled due to a beef supply shortage, that would induce more people to try Impossible burgers. If the price of Impossible burgers tripled, a lot of people would shift back to beef. And what I think people are hoping for out of the fake meat industry is a flywheel. As fake meat products improve, they become more competitive with real meat. That helps spur political action to regulate animal welfare more strictly which both helps animals and also raises the cost of meat. That creates more niches for fake meat to move in and to try to improve the quality of its offerings outside the narrow burger/sausage segment. And the better our meat alternatives are, the more politically comfortable we will be aggressively mandating humane treatment of animals.

The point is that a truly isolated market is actually pretty rare. Most people have their preferences, but they are also willing to accept imperfect substitutes depending on the market situation.

It’s raining Porsches

So what’s a Porsche got to do with the price of a Prius?

Well here’s what a used Porsche costs — kind of a lot. Who wants to pay that kind of money for a used car? I feel like you need to be both rich and also kind of weird.

Now imagine you’re a used car dealer, and a good condition 2018 Cayenne materializes on your lot. You’re in luck; you can sell that sucker for nearly $60k according to this random screenshot on Carmax that I took. But say actually every used car dealer in America gets a good condition 2018 Cayenne. Well, it’s going to turn out that the population of people interested in shelling out nearly $60k for a lightly used SUV from a fancy sports car brand is limited.

So if you like money, you’re going to need to cut prices. And that’s going to undercut the people trying to sell a 2016 Cayenne for nearly $40k, so suddenly those people need to cut prices too. So now you can pick that up for $30k.

Who wants to pay $30,000 for a 2016 Porsche Cayenne? Who knows. But there are only two options here.

One is that some people with roughly $30,000 to spend on a car decide to buy a 2016 Cayenne rather than a brand-new high-end Prius, thus creating more opportunities for Prius purchasers to drive a hard bargain with dealers.

The other is that nobody wants to pay $30,000 for a 2016 Cayenne, in which case the owners of said vehicles need to further cut their prices in order to tempt people away from the Prius market.

So if you have only a weak preference for the new Prius, the Miracle of the Cayennes helps you because it lets you get the (admittedly used) Porsche of your dreams. And if you have a strong preference for the new Prius, the Miracle of the Cayennes helps you because it gives you more bargaining power vis-a-vis the Toyota dealers who are now less willing to walk away from your offers.

Run it in reverse

You can also see the same logic in the opposite direction. Suppose every Porsche currently on the road spontaneously combusts and so does the factory where they build them. What happens next?

Well, Porsche drivers are people of means. They’re not going to start commuting on the bus, they’re going to go buy new cars. And now we get to a crucial juncture in our story.

In normal times, we assume that the car industry is operating with some slack. In other words, you look around at the big automakers — Toyota, Volkswagen, Renault-Nissan, GM, Hyundai-Kia, Fiat-Chrysler —and you assume that in any given month, they are running some of their lines at less than maximum capacity. There was a sales hiccup in some key market because of macroeconomic conditions beyond their control. Or some new car was poorly reviewed and didn’t sell. It’s just a big industry with a lot of players, and not everything works out all the time. So in those normal times, if the Porsche drivers all go to buy new cars, the car companies adjust by basically making more cars.

Right now, though, we know that carmakers are hobbled by the inability to acquire microchips in sufficient numbers to expand production. So if the Porsches all vanish, they can’t just go make more cars. Dealers will react to a surge in demand due to vanished Porsches by raising prices and enjoying higher profit margins.

And because we literally just lived through this exact scenario, we know that a supply/demand mismatch in the market for new cars generates price spikes in the market for used cars. And that actually gets to the main thing submarket theorists get wrong about the housing market.

Nonproduction creates scarcity

We don’t really talk about the market for “used houses” the way we do for cars, but both markets do have the characteristic that brand new construction generally sells for more than an otherwise similar old house. If nothing else, new construction is full of new appliances rather than old appliances and will sell for more as a result. But normally the price gap goes beyond that — new construction fits contemporary tastes in a way that a pre-owned home generally doesn’t, and it sometimes has more upscale amenities.

So I don’t think it is totally crazy for a person with a sub-median income to look at brand new construction that sells or rents for a sum that’s way out of his league and think “what does this have to do with me?”

But that’s exactly what we’ve seen with recent automotive craziness. If some extrinsic factor kneecaps new car production, people don’t just throw up their hands and say “well, I’m in the new car submarket so I guess I have no choice but to just go carless.” Some people pay the new, higher price for newly scarce new cars and other people switch into the market for used cars where they bid the price up.

Supply constraints create luxury

The Prius is made by Toyota, most of whose cars are labeled as Toyotas.

But Toyota also makes fancier, more expensive cars that it sells under the brand name Lexus. The Lexus marquee first went on sale in 1989 and the project that originated it began in 1981. Acura, which is the Honda version of Lexus, launched in 1986. Infiniti, which is Nissan’s version, was launched in 1989. Interestingly, all three of these brands premiered in North America rather than in Japan.

So why did all the major Japanese automakers decided to create luxury sub-brands in the 1980s and do so specifically in the United States?

Well during the 1980s, the Reagan administration used threats of tariffs to get Japanese automakers to agree to Voluntary Export Restraints — quotas on the number of Japanese cars that could be shipped to the United States. Over time, the Japanese auto manufacturers got around this by building car factories in the United States. But in the short term, the quotas propped up American manufacturers’ pricing power. It also changed the incentives for the Japanese automakers who earlier had been trying to sell every car they could profitably manufacture, even if the margins were low. Faced with quantitative limits, it made more sense to strategically focus on filling the quota with high-margin vehicles. Hence Accura and then Infiniti and Lexus.

And I think that’s the real lesson of the luxury car market for the American housing market. If you can only add so many units per year, you want to make the units as high-margin as possible which means using the fanciest possible finishes, packing in as many amenities as you can fit, and then trying to charge a really high price. In an unconstrained market, new-build will still be more expensive than owned. But just as Toyota can only sell so many Lexuses, you’d find that you run out of rich people at a certain point and need to start churning out the new-built equivalent of a Camry. Right now in many metro areas, you run out of building permits before you run out of Lexus customers.

Comment

Share

This post is only for paying subscribers of Slow Boring .

Like & Comment

© 2021 Matthew Yglesias Unsubscribe

548 Market Street PMB 72296, San Francisco, CA 94104

Publish on Substack