Consider buying a new condo, with an asking price of $500,000. Whether it is a good deal today at $500,000 is partly a question of whether it will one day sell for more or less than $500,000. Your purchase is a wager, based on the information available to you, that the value of your condo and similar properties in the area will continue to appreciate.I'm not sure Keynes's beauty contest argument applies well here, although the fundamentals determining whether a neighborhood prospers or not are not always immediately obvious. Thus, the early adopters matter, specifically the head shop in a neighborhood in Seattle.
Your decision to buy also depends on what amenities are nearby now. Will your friends want to move in nearby? Will restaurants and a grocery store start filling up empty storefronts nearby, and will they be able to stay in business? Will you have access to reliable transit lines when you move in? In a decade? All these questions also factor into whether you choose to buy here or across town.
There is no way to poll all the people somehow involved in such questions, so we have to play a beauty contest game, guessing what our friends, local restaurateurs, and transit planning agencies are thinking, and what they will be thinking in a decade. Meanwhile, they’re all doing the same thing: just as I don't want to move to a neighborhood with no restaurants, no restaurant wants to open in a neighborhood where they aren’t likely to have customers.
The pot shop is a single storefront on a block with more than a dozen buildings, in a neighborhood spanning dozens of blocks. It’s highly unlikely that a market-moving number of pot smokers decide where to live based primarily on proximity to their favorite supplier. The neighborhood’s proximity to downtown is obviously an asset, and it’s just down the road from a historically gay neighborhood, Capitol Hill, where rent is higher and homes sell for an average of $677 a square foot. [Head shop proprietor Ian] Eisenberg, for his part, thinks the Central District would have gentrified with or without him, given how close the neighborhood is to downtown Seattle; but the fact is, other neighborhoods that are equally close to downtown have not yet gentrified, suggesting that there is something else going on.Perhaps, although it's Seattle, already chockablock with amenities for Creative Class types and home to several important high technology companies, as well as the U.S. port closest to Japanese and Chinese ports. The story might not generalize to Spokane or Youngstown.
More than just a place to buy pre-rolled joints with names like "Bubba's Gift" and Body Buzz bath salts, Uncle Ike’s is a signal that radiates out to the bars, the coffee shops, the developers, and the yuppies. The new bars and restaurants and gluten-free doughnut shops are a response to that signal, forming a reverberating feedback loop of signals that leads to more and more businesses (and sleek new apartment buildings with downtown views) that tell white and wealthy people: You're welcome here. This is a place for you. Gradually, the neighborhood starts to feel more like many other neighborhoods in Seattle: new, well-maintained, predominately white and middle-class.
o why does this sort of thing happen—not just at 23rd and Union in Seattle, but in similar neighborhoods around the country? Racism, classism, or conscious beliefs about future land values could be part of the reason. But even in the absence of those kind of conscious beliefs, the opening of a business like Uncle Ike’s could have still moved the market.
On the other hand, the presence of the right kind of business, or the wrong kind of business, or of a suspect population, might affect location patterns. The second part of the Strong Towns beauty contest series will simulate location patterns, based on the strength of simulated agents' preferences of like for like.
In the first simulation, some people have a strong preference for living near a useful amenity. They may also have an aversion away from other locations, whether they’re liquor stores with bulletproof glass or people of a different nationality. In the second, the people bidding on houses have no serious desire to live next to the amenity and no concern about race at all, but everybody knows that there are other people, somewhere, who do. It is the second simulation—the one where overt preferences don’t exist—where we really see home values shift in both directions.What intrigues about the simulations is the role of ignorance. In the first simulation, some agents have strong preferences, either to live near an amenity, or to live far from a suspect population. The presence of the amenity (a bakery: it could be a head shop or a trolley stop) leads to higher property values near it, while the presence of a person of a suspect ancestry has little effect on property values, provided there are sufficiently many sims who don't worry about such things. At the margin, those sims always outbid the more squeamish or more prejudiced (interpret as you wish) sims.
In the second simulation, people think they might be bidding against more amenity-preferrers (the interpretation is hipsters who value proximity to the head shop) or against fewer suspect-avoiders (zemblophobes, in the article) and thus raise their bids to live closer to the head shop, expecting more competition, while lowering their bids to live near the suspect population. I suspect the simulation is using Cournot bidding.
Everyone in Squareville knows hipsters think it's cool to live next to a pot shop, so bidders on nearby houses expect that there is some chance that competing bidders are hipsters who will bid higher for the choice location. Expecting competition from enthusiastic hipsters, bidders on a property by the pot shop raise their bid by 15 percent. As outsiders, we know there are no hipsters in Squareville. But that doesn’t matter—in our simulation, everyone thinks that there may be high-bidding hipsters competing for houses near the pot shop, so the price around the pot shop goes up anyway.The model, I fear, neglects some arbitrage opportunities: in equilibrium, shouldn't a hipster be indifferent among houses at varying distances from the head shop (and whatever other businesses agglomerate there) and therefore land values will reflect transportation costs, and that arbitrage opportunity can bid up housing prices near the zems?
The plot in Figure 2 shows the result of a simulation over 250 periods using these rules. The effect of perceived zemblophobia is greater than the effect of actual zemblophobia in our first simulation. In other words: the fact that people believe others think Zemblans are bad for property values causes that assertion to be factually true. Meanwhile, the effect on prices around the pot shop is similar to the effect of the bakery—even in the absence of any high-bidding hipsters. The beauty contest makes the problems of perceived markers of lower and higher neighborhood value especially ingrained. We can't just flip a switch and say, “Okay, redlining is over; no more discrimination”—or “hipsters are over; no more gentrification.” Even if nobody actually believes that Zemblans are bad for property values, or that hipsters are good for housing prices, as long as there are people who erroneously think people with those beliefs exist, we're off to the races and the beauty contest argument applies.
Further, in order for the cascade to work, everybody's expectations must be consistent.
In the first example with actual zemblophobes, some people bid lower on houses in one neighborhood, but others placed an "objective" bid based on market conditions—and it's the high bidder who wins, so a real change in prices was difficult to observe. This is the story of the free market smoothing over imperfections: if people bid below the accepted norms because of personal biases, they lose. But even in the absence of overt racism, a population of indifferent people who modify their bids according to the belief that others expect a norm of racism, could be sufficient to explain some of the patterns we observe.Game-theoretic models aren't always useful thinking about out-of-equilibrium behavior, and there are a couple of sensitivity analyses in the post that suggest hot neighborhoods or segregated neighborhoods need not be ubiquitous.
Something also occurs to me that perhaps the "binary choice" we hear so much about at election time reflects people modifying their voting behavior according to the belief that others expect a norm of making a binary choice, but that's too much to think about just before nap time.