Satoshi's Sidewalk #15: Cinder-Block-to-Flow

He who controls the cinder blocks, controls the rate of building.

Context: The concept of stock-to-flow was introduced to bitcoin in Saifedean’s The Bitcoin Standard. Later in March 2019 an article was published by PlanB called Modeling Bitcoin Value with Scarcity. The article illustrated the price changes of bitcoin over time when compared to the bitcoin creation to existing stock of bitcoin. PlanB later posted another article called Bitcoin Stock-to-Flow Cross Asset Model (S2FX) which analyzed what he calls phase changes in price with an updated twitter post to include real estate.

We jump right into today’s edition with S2FX. PlanB asserts the estimated value of real estate to be approximately $108 trillion. I am not sure as to what is included in the $108T, however, we can be conservative and assume it is the value of all land and and improvements therein.

From a 30,000 foot view, this may be helpful but it’s an inaccurate assertion when we look under the hood. At Bitcoin Urbanism we define real estate as the geographic land, economic land (natural resources, productive space, etc.), and improvements (buildings, infrastructure, etc.). The rate at which the market value of real estate increases is rather slow but is directly tied to the quantity of credit within the financial system and the rate at which new development or redevelopment occurs.

Development (new development and redevelopment) today kicks off with debt financing. The housing boom (re)occurring across the US is the result of low interest rates and the Federal Reserve purchasing mortgage backed securities. The commercial real estate market is frankly a shitshow. The same games played with residential MBS which triggered the 2008 Great Financial Crisis is currently happening with commercial MBS. Real estate has become a highly finacialized, manipulated asset class. Caveat emptor.

Now that we’ve got the money side out of the way. Let’s talk cinder blocks.

Development is a overly-politicized and highly regulated process at the local and state levels. Federal land use regulations are onerous but not as prevalent as local and state for most development. The local approval process will be described in more detail in the future, however, for simplicity the development process in my hometown from beginning (property under contract) to end (building permit in hand) takes around 12 to 16 months if things go well. If the elected city council members are anti-development - good luck.

The point is this: there is no way to know how fast development of real estate would occur without the permission-based system currently in place.

The flow of real estate development in any localized marketplace is limited by the bandwidth of government’s ability and the political will for approvals. Some places are better than others, some places are much, much worse (i.e., New York City). The more politicized the process, the greater the risk of failure for uncontrollable, external reasons. The US has a highly politicized local process of city council, neighborhood, and bureaucratic approvals. Everyone has a say, therefore everyone has a gripe. This has not been the process forever.

A hundred years ago these roadblocks were just being set up. Owners of real property could buy a plot of land, hire an architect, hire a builder, and start building the next day. Supply and demand for shelter, retail, commercial, and industrial spaces could be met with greater ease, speed, and customization. Land was developed with more intense and differing uses without permission-based systems to do so - a free market in development.

Today the world operates on the opposite end of the spectrum with a few exceptions. Governments use codes and zoning to prohibit specific uses, require permits for uses, prohibit building designs, materials, floor plans, building heights, colors, etc. The list goes on. The limitations and prohibitions are sold as preventing all manner of suspect societal ills - environmental, sight, neighboring property values, proximity to other uses, etc.

The flow of new development is severely limited. Real estate as a category generally has become the tragedy of the commons. Geographic space is wasted without thought on unnecessarily wide streets, ridiculous building setbacks, and under-utilization of intensity (not being used for multiple purposes). The aforementioned process is the real (cinder) block limit. PlanB’s assumption of $108 trillion in real estate value suffers from a) financialization of the asset class and b) severely curtailed abilities to develop real estate in a manner the market desires.

What would real estate look like under a free market with sound money, real property rights, and the rule of law? Could we even compute the theoretical market cap of real estate knowing how artificial and arbitrary development restrictions severely curtail development?

Better yet, is the dollar amount of development malinvestment calculable?


Check out my appearance on the Tucson Bitcoin Podcast. Alex and I discuss bitcoin urbanism, the Phoenix housing market, and more!