One of the interesting things about return-to-office trends is that there's a meaningful difference between smaller and larger cities. In smaller cities, most people have returned to working in their offices. But in larger cities, this hasn't been the case. This makes intuitive sense. Larger cities tend to have more expensive real estate (which forces people to decentralize) and, in turn, longer and more punishing commutes. So in a larger city, the individual benefits of WFH (i.e. having zero commute costs) tend to be far greater.

However, in-person interactions are critical to what are known as agglomeration economies. This is why we have things like financial districts -- because there are real economic benefits to even competing firms locating proximate to each other. WFH arguably reduces these benefits. And in this recent report called, Doom Loop or Boom Loop: Work from Home and the Challenges Facing America's Big Cities, the authors, Richard Voith, David Stanek, and Hyojin Lee, have tried to estimate what these agglomeration losses might be for cities like New York, San Francisco, and Philadelphia.

Here's New York City:

If you agree with their assumptions, then you might also agree with their policy recommendations. Among other things, the report argues that larger cities, like New York City, should be focused on promoting themselves to industries/jobs that benefit the most from in-person interactions, recognizing that WFH isn't going away. At the same time, cities should understand that reducing the cost and increasing the pace of housing production also helps to reduce agglomeration losses. It keeps more people centralizing around a particular place.

To download the full report, click here. It's an interesting read.

One argument that you might be able to make is that home prices follow urban density. New York City, for example, is dense. And homes in New York City tend to be more expensive than those in, oh I don't know, rural Canada. So with this, you might conclude that development and density are bad -- it makes housing more expensive. But then there's places like San Jose, California. It's not very dense, and yet it has some of if not the most expensive housing in the US.

Well, it turns out that housing density and median housing values don't actually exhibit a particularly strong correlation. A better and much stronger relationship can be found in what Kasey Klimes explains, here, in this excellent post, which is that home prices more accurately follow incomes. In other words, the more high paying jobs that exist in a market, the more likely that housing will be expensive.

Here is what that looks like for US metros over 1 million people:

The above chart compares median home value to aggregate income per unit of housing. And here, Kasey discovers an r-value of 0.9, which suggests that "over 81% of median home values in large metros can be attributed to aggregate income per unit of housing." This explains why San Jose, and San Francisco, are such outliers. They have very high incomes for every unit of available housing, despite the former being not all that dense.

Okay, so now that we know this, how do we make housing more affordable? One option is to just make people poorer. If you reduce incomes per unit of housing, then home prices will, almost certainly, go down. And this is why poorer cities tend to have more affordable housing. But this is obviously suboptimal. The better option is to keep people wealthy and simply increase the denominator in "aggregate income per unit of housing."

Meaning: build more housing!

Chart: Kasey Klimes

Here's a cogent argument by Dror Poleg about how urban economics can be used to explain the evolution of Web3, and also why it's all a bit of a ponzi scheme, but that when it works, it works.

His argument revolves around ownership and participation. If you own real estate in a city, you could say that you are both a part owner of said city and a participant. You participate by virtue of living and/or doing other things there, but beyond that you also have a vested interest in the city doing well. Because if the city continues to do well and grow, there should be more demand for real estate, including yours, and that likely means your wealth will increase over time.

This same force could be said to apply when existing property owners oppose new development. It restricts supply and increases the value of people's existing "ownership" in a city. It's kind of like being a company and not issuing new shares so as to not dilute your existing shareholders.

This connection between ownership and participation is similarly a hallmark of Web3. In the world of crypto, users buy tokens (some fungible and some non-fungible) and those tokens provide access and rights to various things.

For example, owning tokens might allow you to vote on key decisions affecting the overall organization. And if the organization does well and continues to grow, all token holders should, in theory at least, see their wealth increase. More people will want those same tokens. Ownership and participation.

Web2 companies, on the other hand, do not typically offer this automatic connection between ownership and participation. That is, of course, unless you're a shareholder. If you're just a regular user of a platform like Instagram (which I am), but you don't own any shares in Meta (I do not), then you're only a participant.

If you happen to be a widely followed influencer then you can certainly benefit indirectly from the platform, but you do not benefit from any sort of direct ownership in the organization. Pretty much everything accrues to the house.

In fact, you also don't own your followers, from which you derive your indirect benefit. Not to pick on Meta, but if Meta decided that your content was suddenly inappropriate for the platform, perhaps too salacious, then it could choose to close you down and your indirect benefits.

This, of course, is one of the great promises of crypto and Web3. If you're a part owner and you have some say in the way things are being run, you can maybe avoid this kind of outcome. And if things really aren't working out, one should have the flexibility to take their followers and be extra salacious somewhere else.

We shall see if this is ultimately how Web3 plays out, but the connection between ownership and participation is an interesting one and, if things do end up working out as planned, maybe it can be harnessed to improve our cities. Because we know the problems: inequality, housing supply and affordability, and many others. The system is clearly far from perfect.

Photo by Adrian Schwarz on Unsplash