The fraction of high-income families in superstar cities is 43 percent higher than in average cities, and those cities' share of poor families is 11 percent lower.
Between 1950 and 2000, the price of housing grew by an inflation-adjusted annual rate of 2.2 to 3.5 percent in the ten U.S. metropolitan areas with the highest rates of growth, and by 0.5 to 1.1 percent in the ten U.S. metropolitan areas with the lowest rates of growth. Over the same time period, the number of families living in U.S. metropolitan areas doubled and the number of families with inflation-adjusted incomes above $140,000 in 2000 dollars grew more than eight-fold.
In Superstar Cities (NBER Working Paper No. 12355), authors Joseph Gyourko, Christopher Mayer, and Todd Sinai suggest that the explosive growth in house prices in high-cost cities is fueled by three factors: the scarcity of housing units, the growing number of high income families in the United States, and the fact that high-income families have been willing to outbid lower-income families for scarce housing in preferred locations.
Superstar cities are those with an inelastic supply of housing (that is, cities where it is difficult to construct new housing because of geographical constraints or zoning) and an appeal to a broad clientele of potential residents. As households compete for the scarce locations, the ones with the highest willingness-to-pay - a function of a household's desire to live in a given city and how much money it has - bid up house prices. Using a simple method to roughly categorize cities as "superstars," the authors find that in the 1960-80 period only San Francisco and Los Angeles clearly qualified. Between 1970 and 2000, twenty more metropolitan areas, including New York and Boston, were added. Cities that have experienced explosive growth but remain outside the superstar category, like Las Vegas and Phoenix, are distinguished by their ability to build enough housing to moderate price increases.
As the U.S. population grows, both in absolute number and in income, the fraction of people who can reside in their preferred cities declines when those cities cannot add enough new residences. The process of bidding to live in high-demand, low-supply cities changes the composition of residents as rising house prices mean that lower-income families are crowded out of the hottest areas and replaced by higher-income households. For example, in San Francisco the share of families earning more than $110,000 grew by 21 percent between 1970 and 2000. Nationwide, the average growth in that income group was 9 percent.
Overall, the fraction of high-income families in superstar cities is 43 percent higher than in average cities, and those cities' share of poor families is 11 percent lower. Recent movers into superstar cities are more likely to have high incomes and less likely to be poor, than recent movers into other cities. The higher share of rich and lower share of poor also holds true for superstar places, that is, desirable towns with a relatively fixed housing stock within a metropolitan area.
With more relatively wealthy people bidding on a limited housing stock, the price of entry-level houses, and the price-to-rent ratio, accelerates when cities fill up and approach superstar status. Entry-level prices and the price-to-rent ratio also increase at higher rates when the number of high-income families increases nationally.
In short, residence in superstar cities and towns has become a luxury good. The cities' increases in housing price appear to outstrip known productivity increases and the value of any additional amenities.
The authors note that the evolution of superstar cities has important implications for the future of urban areas. For example, it raises the question of whether a metropolitan area that becomes affordable only to the wealthy can maintain its cultural or economic vibrancy. It also raises the question of what optimal public policy should be - and whether it should lead to an outcome where lower income workers cannot afford to live in superstar markets. For example, existing superstar cities and towns could moderate their housing costs by allowing increased density, but have chosen not to
-- Linda Gorman