America's hunger for luxury housing may finally be satiated

The rise of housing costs in America's big cities has seemed unstoppable. Until now.

Last Thursday, Bloomberg reported that the median monthly rent in Manhattan stalled out, falling 1.2 percent in September to hit $3,396. "It was only the second year-over-year decline since February 2014," the outlet continued, citing a new study from appraisal firm Miller Samuel, and the brokerage Douglas Elliman Real Estate.

That second decline happened in March of this year. It was followed by a peak of 2 percent growth in June, and then rents in the Big Apple slowed again before falling last month. Further signs that the housing market has shifted include the fact that landlords are offering renters more sweeteners, like a month or two free; meanwhile, only 17 percent of all housing sales in Manhattan involved a bidding war this year, down from 31 percent last year.

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"The market does not appear to be resuming an upward pattern anytime soon," Miller Samuel's president told Bloomberg.

And it's not just Manhattan or New York. Over the last year, the rate of rent growth has dropped precipitously in Portland, San Francisco, Denver, and Houston as well. Equity Residential, a major real estate trust that gets half its business just from San Francisco and New York, has already cut its revenue growth forecasts three times in 2016.

"Markets do reset from time to time, either due to new supply or changes on the demand side of the equation," Equity Residential's CEO, David Neithercut, told Bloomberg. "We're experiencing both factors in two of our most important markets."

Around 5,100 new apartments will be listed for rent in San Francisco in 2016, which is the biggest annual number in 26 years; Manhattan will feature 5,675 new units. And 2017 will probably blow 2016 out of the water, with projections showing San Francisco gaining around 7,000 more units, and New York getting 14,000 new units. In fact, back in July, 2016 already looked set to meet or break apartment construction records in the major markets across the country.

Now, most reporting on the housing crisis in American cities has focused on the supply side. And it's true it's a big problem. Many big cities suffer from historical preservation laws, zoning codes, and other regulations that make it hard to build enough supply to bring down prices. San Francisco is the poster child for this problem — for 5,100 new apartments to be a historic high is pathetic — but it's a huge issue in New York, Washington, D.C., and other cities as well.

But demand is also half the equation here. Much of this booming construction is in the super high-end market — it's telling that the "low-end" market in Manhattan is considered to be all housing under $2 million. And it looks like the population that could afford to buy or rent those sorts of luxury units is dwindling: The number of highly paid tech jobs in San Francisco is down from a peak earlier this year, and it's mid-pay jobs in hospitality and health care that are seeing the biggest gains in New York City.

Needles to say, people like Neithercut who make their living investing in the housing market are a bit freaked out. But this is good news for most Americans.

The housing market is shaped by the broader forces in the economy, and the rise of inequality in particular has created a kind of perverse feedback loop: It generated an upper class that can pay these sorts of prices and rents; but it also shifted the geography of the economy, restricting job growth and business creation to major urban centers. About 30 percent of the apartment units now under construction are in cities, compared with 15 percent 10 years ago.

So demand for housing in cities spiked as people poured in looking for jobs, driving up prices. But because most of the money was concentrated in the upper class, that's the market developers went after. The nature of the housing crisis in many of these cities is not so much that there are never rooms available — there are — it's that they're unaffordable for most mortals.

That situation may finally be catching up with developers, as they find themselves stuck with luxury housing they can't clear at current prices. That's consistent with the story most people who focus on the supply side tell: If we encourage construction enough, developers will over-build in the high-end markets first, which will force them to cut prices, which will then force them to retool and go after the low-end markets to keep business up. And that could certainly work, though it might take a while: For prices to not just slow but plummet in places like San Francisco would require enormous amounts of construction. And even if only 17 percent of apartment sales in Manhattan now include bidding wars, it's still really high historically.

That means there's an argument for attacking the demand side too: Using public investment to rebuild the economies outside major cities and make those places more attractive to live; and using taxes and transfers to cut the purchasing power of the upper class, while building the purchasing power of everyone else.

America's housing market appears to have finally started correcting itself. And left to its own devices, it will probably continue doing so. But there's no reason we shouldn't help it along.