Coastal cities like Washington D.C. and San Francisco were already expensive places to live at the start of the 2010s. Then prices in these “superstar” cities became even more stratospheric as housing supply failed to keep up with booming job markets.
However, in the last few years a combination of two events—the 2017 tax law and the COVID-19 pandemic—led to a change. First, the 2017 tax law cut taxes overall while limiting tax breaks for owning expensive housing. Then the COVID-19 pandemic changed peoples’ lifestyles and thereby shifted their housing preferences.
These seemingly unrelated events both made housing in the most expensive metropolitan areas less attractive relative to housing elsewhere. That created an opening for a second group of cities that provided attractive amenities at more reasonable prices.
Out of America’s 100 largest metropolitan areas, nine have experienced home price growth of more than 50 percent since late 2017 when the tax bill was signed into law. They are Boise, Spokane, Austin, Phoenix, Tucson, Colorado Springs, and a cluster of Utah cities: Salt Lake City, Ogden, and Provo.
These somewhat smaller metropolitan areas, largely located in the Mountain West, had a variety of advantages: reasonable prices, a growing high-tech economy, good weather or natural beauty, and relatively lower state and local taxes. While they were on a moderate upswing even prior to 2017, the combination of pre-existing trend, tax law changes, and the COVID-19 pandemic created a dramatic increase in demand, propelling strong appreciation in property values.
Over the latter half of the 20th century, economists marveled at the extraordinarily strong growth of four Asian jurisdictions: Hong Kong, Singapore, Taiwan, and South Korea, which were collectively dubbed the Asian Tiger economies. While this subject matter is worthy of detailed treatment, it is fair to say that these economies—while smaller than the world’s largest economic heavyweights like the UK or Germany—were able to capitalize on contemporary trends, accelerate their development, and carve out important economic niches for themselves.
The nine American cities that I will call the Mountain Lion economies are playing an analogous role in contemporary American economic geography. While they are generally too small to replace America’s largest economic hubs, and they are unlikely to become as expensive, they are nonetheless undergoing radical change and experiencing a rapid upswing in housing demand.
Real estate prices surged in the West
The changes in the Mountain Lion economies have been extraordinary. These housing markets were affordable prior to 2017, especially for renters, but generally had modestly elevated prices relative to the national average, suggesting that even a few years ago buyers expected those rents to pick up.
That rise accelerated greatly after the 2017 tax law and the COVID-19 pandemic; real estate values in the Mountain Lion areas skyrocketed. In Boise, prices doubled in under four years.
Over the same period, prices in traditional superstar economies slowed at times, or even reversed. There is no consensus definition of a superstar city. But for this article we’ll focus on six metropolitan areas that are obvious centers for high-powered jobs: San Francisco, San Jose, New York, Los Angeles, Boston, and Washington DC.
These superstar cities, at least for a time, seemed like they would continue their relentless appreciation. They became too expensive, and demand at last began to waver, especially as the tax law and the pandemic made them relatively less attractive. Some of that demand spilled over to the Mountain Lion economies. Additionally, housing as a whole became more expensive as the pandemic led people to value home space more, and other consumption less.
National demand spilled over
The rapid rise of Mountain Lion real estate markets is obviously connected to housing shortages in cities like San Francisco and Los Angeles. But this is not just a simple story of one-way outmigration from California. Instead, it is best to see it first as a product of national forces.
The biggest force propelling real estate prices upwards is a rising number of relatively high-earning households ready to buy, and a large pool of savers ready to lend to them at favorable rates.
Every year, the U.S. mints about two million new households with six-figure incomes. For example, if you go by tax data, there were 27.7 million households with more than $100,000 in taxable income in 2017, and 29.7 million such households in 2018.
These high-income families can afford to spend a great deal on housing. At today's low interest rates (often about 3 percent), even a household with an income of just $100,000 can easily be approved for, and afford, a $500,000 loan.
Furthermore, many households are willing to pay a premium to get the best house they can afford. So each year there are as many as 2 million new households able and willing to purchase real estate at prices well above the national average.
The US only starts about 1.2 million new houses each year. So even if every single new home went to a family with a six-figure income, there would still be hundreds of thousands of other affluent families out there bidding up the price of older homes.
And crucially, the demand from these higher earners is not evenly spaced throughout the country. Instead, it tends to cluster. You like to be around people in your industry, as economists like Masahisa Fujita and Paul Krugman have shown. The traditional superstar cities have the largest clusters, but other clusters can develop, and some are currently developing in the Mountain Lion economies.
Unfortunately, superstar cities did not build enough to supply housing for everyone who wanted to work in their mega-clusters, driving up prices. Frequently, aside from their principal selling point—access to a top job market—superstar city homes were poor bargains, leading to darkly comedic stories about home buyers getting miserable value for their money.
There is an easy narrative to tell: that the traditional superstar cities, especially the California ones, screwed up their housing markets and produced “refugees” to other western states. While this narrative is undoubtedly true for some, it is incomplete and reductive. Demand for housing in Mountain Lion economies doesn’t just come from California transplants.
It might be better to say that the U.S. as a whole produces many high-earning individuals, and the superstar cities are no longer providing sufficient housing to absorb them all.
Mountain Lion economies have long-standing advantages
There are more than a hundred million homes in the U.S., and dozens of medium-sized or large cities. In theory, people and firms could choose to locate anywhere. So why did the Mountain Lion cities become so popular in the last four years? They actually have a variety of long-standing advantages. In fact, home prices there were somewhat high, and rising, even before the recent boom, suggesting that savvy buyers saw a lot to like in them.
One feature of almost every Mountain Lion city is a stunning landscape. The Utah cities have the Wasatch mountains and the Great Salt Lake. Boise has an eponymous mountain range and river. Colorado Springs has the glacier-carved Pikes Peak. (I will acknowledge here that Austin has no mountains, but it happens to be economically similar to the Mountain Lion economies in other respects.)
A beautiful outdoors has always been a long-run advantage in real estate; natural beauty is just a permanent tailwind that helps a place develop and attract newcomers. A place with mountains in the distance and a pleasant climate will always, all else equal, attract more investment than a flat cityscape.
A second feature is a pre-existing presence of high-quality universities, and valuable (if niche) cutting-edge industries. While these cities—at least the smaller ones—would never compete with major hubs, they can become centers of smaller sub-industries or secondary headquarters for firms that also have presences in larger hubs.
For example, the cluster of Utah cities has a solid software industry, home to valuable business-to-business firms like Qualtrics or Divvy. These firms were founded by graduates of local universities like BYU or University of Utah. Colorado Springs creates incredible advances in aerospace. Austin is the longstanding home of Dell, it hosts secondary offices for a variety of larger tech firms, and it has increasingly become a location of choice for independent online video content creators.
These companies don’t exert the same gargantuan force on local housing markets as, say, Facebook, Apple, or Google (whose headquarters are all located within about twenty miles from each other) but they do create a growing social, commercial, and employment environment that would be attractive to high-wage workers in cutting-edge industries. These ecosystems often start as accidents of history, just products of specific founders who happened to be born there, or government projects that happened to be located there. But a network builds around them.
Most of all, though, these newer cities allow people to live more cheaply than in superstar cities. If the Los Angeles area could offer a more reasonable cost of living, the Austin community of video streamers might not exist. The burgeoning industry is at a natural intersection of some of L.A.’s existing strengths, like entertainment, visual content, and video game development. It would stand to reason that L.A. offers a natural employment cluster for streamers. But L.A.’s high cost of living repels some people, and this results in the creation of new industry elsewhere.
Many people, but not everyone, benefit from this new demand in Mountain Lion economies. Homeowners considering downsizing, selling, or reverse-mortgaging will find themselves with more cash on their hands. Service businesses in town will find themselves with a larger, wealthier, less price-sensitive group of customers to cater to. Businesses like Qualtrics will benefit from having a greater pool of workers to choose from. However, those who only rented and aspired to purchase a home later will find their goal becoming more expensive. Those who work in a goods-producing industry like agriculture might not benefit from the influx of service-industry talent. Overall, more people would be able to benefit if the cities responded to the new demand by building more housing.
The 2017 tax reform limited housing deductions
In addition to long-run forces that strengthened Mountain Lion economies, their rise was accelerated by the 2017 tax reform. The bill signed into law by President Donald Trump at the end of 2017 used several different mechanisms to curb tax deductions that go along with expensive housing. This is a part of the bill I am very familiar with. During my think tank career, I advised some of the politicians who crafted the bill to go forward with these limitations, and I summarized the effects of the policies in a report for the Joint Economic Committee.
The limitations are threefold: two direct, one indirect. The first direct limitation was to apply the mortgage interest deduction only to interest paid on the first $750,000 of principal. That is, for any loan amount beyond that, you would get no additional benefit from the mortgage interest deduction. This $750,000 limit was a reduction from a previous limit of $1 million.
The 2017 bill also capped the deductibility of state and local taxes at $10,000. This was most likely to affect homeowners with large property tax bills.
Finally, the 2017 tax reform nearly doubled the standard deduction, from $13,000 to $24,000 for married couples filing jointly, and similarly proportional increases for other filing statuses. This is an indirect limitation on the value of the previous two deductions. Taking the standard deduction means forgoing itemized deductions, so the more generous the standard deduction gets, the fewer taxpayers will itemize, and hence the fewer taxpayers will benefit from the mortgage interest or the SALT deductions.
All told, the reform made homes in expensive markets less valuable. The beneficiaries of these tax deductions were heavily concentrated in high-cost and high-tax areas. So after the 2017 law passed, it became even more expensive to live in these already expensive areas. Regions that relied less heavily on these deductions got larger tax cuts, which gave people a financial incentive to consider moving to them.
The COVID-19 pandemic redefined industry agglomeration and increased demand for space
Until the COVID-19 pandemic, the best case for the extreme outsize housing demand in superstar cities was the job market. Cities with elite industry networks, like Krugman and Fujita studied, generated a self-reinforcing cycle; firms liked to be in those places to tap into their deep talent pools; people moved to those places for the high-paying jobs.
All of that changed when office life moved online for many workers. The industry networks that previously existed in physical locations instead existed virtually. Commute distance no longer mattered very much, if at all.
More companies became willing to hire white collar employees who didn’t live near a company office. Many employers also became dramatically more flexible about where their existing white-collar employees lived, since they weren’t coming into the office anyway.
As a result, people began to look for different things in housing. They still looked for good climates and services and schools, but they became more interested in having a lot of space, rather than a short commute to a top job market’s central business district.
Meanwhile, workers who kept their jobs but cut back on dining, traveling, and other consumption activities found they had extra savings available to make a bigger down payment on a home. Other savings in the economy helped bring down mortgage rates, allowing borrowers to stretch their income farther.
Of course, the shift in housing demand describes only a small subset of people. Many workers did not have the opportunity to work from home during the pandemic, and many older workers already owned a home and had put down deep roots in their existing metropolitan areas. Most Americans did not relocate as a result of the pandemic.
But even a small number of movers or would-be movers has a powerful effect on the real estate market. Only a small percent of units are vacant at any given time, and it takes years for a city’s housing stock to adjust to a sudden surge in demand— even if a city is lenient with permitting. The COVID-19 shock happened far too quickly for markets to adjust through anything other than higher prices.
The tax reform bill and the pandemic are both potentially temporary shocks to the housing market. Much of the tax reform bill, for procedural reasons, will expire in 2026. The COVID-19 pandemic is likely to become more manageable as vaccines proliferate and the severity of the typical case declines. It is likely that demand in the traditional superstar cities will continue to rise.
However, insufficient housing construction in these cities will likely create continued overflows into other, cheaper markets. So there’s still a lot of potential for growth in the Mountain Lion economies—and perhaps other metro areas that follow in their footsteps.