Manmade Scarcity Drives Up Housing Prices
"The evidence points toward a man-made scarcity of housing in the sense that the housing supply has been constrained by government regulation as opposed to fundamental geographic limitations, especially in the last two or three decades."
House prices in many communities, especially in urban areas on the East and West coasts, have soared in recent decades. Across the nation, real housing prices have risen relatively modestly since 1950, by less than 2 percent a year. As for the more rapid rise in real prices in the last several years, some blame low mortgage interest rates resulting from the Federal Reserve's easy monetary policy, which made homes affordable to more and more Americans.
The key underlying reason for rising house prices, though, is supply, according to economists Edward Glaeser, Joseph Gyourko, and Raven Saks. Since 1970, homebuilders have faced increasing difficulty in obtaining regulatory approval for the construction of new homes. Local residents -- more educated, more affluent -- have had a greater ability to block new projects should they be deemed harmful to their own interests, for example to the value of their homes. As a result, cities have changed from "urban growth machines to homeowners' cooperatives," the authors write in Why Have Housing Prices Gone Up? (NBER Working Paper No. 11129).
Looking at 316 metropolitan areas of the continental United States, the authors note that the average home price has increased 1.7 percent faster than general inflation annually from $59,575 in 1950 (in 2000 dollars) to $138,601 in 2000. More notable is a growing variance in prices. Average prices rose 72 percent since 1970, but the spread of prices (measured by the standard deviation) across metropolitan areas increased 247 percent as contractors had difficulty finding suitable building lots in what are regarded as hot housing markets.
Construction costs do not explain the price surge or the greater variance, the authors note. Since 1970, the after-inflation cost of building a house has declined slightly on a nationwide basis. Even in booming markets, construction-cost increases have been modest. Real construction costs between 1970 and 2000 rose a mere 4.6 percent in the San Francisco area and 6.6 percent in Boston. In those same three decades, house prices rose 270 percent in the San Francisco area and 127 percent in the Boston area.
Moreover, improvement in the quality of houses accounts for only about one quarter of the average increase in average housing values, the authors calculate. In high-price housing areas, quality growth is even less important.
What has happened is that fewer homes are being built relative to the existing stock of houses. In a sample of 120 metropolitan areas, the housing stock climbed 40 percent in the 1950s; in the 1990s, housing stock rose only 14 percent. The 1990s average change for the 120 areas was double that in booming markets as San Francisco, New York, and Los Angeles where it is more difficult getting land approved for development.
As evidence of this difficulty, the authors note that the physical cost of building a home as a percentage of the home price has diminished over time. In 1970 and earlier, structure costs represented about 90 percent of the value of a home in most areas. But since 1980, the cost of land and obtaining regulatory approval has shrunk the importance of building costs as a factor in house prices. For instance, along a swath of the east coast roughly approximated by Amtrak's Northeast Corridor, the non-structure component of house value exceeded 40 percent by 1990. By 2000, this pattern had spread to 27 metropolitan areas. In the San Francisco area, an outlier among metropolitan areas, structure costs probably represent no more than 30 percent of house value.
The evidence, the authors write, points toward a man-made scarcity of housing in the sense that the housing supply has been constrained by government regulation as opposed to fundamental geographic limitations, especially in the last two or three decades. They see evidence that judges and local government officials have become increasingly sympathetic to community and environmental concerns with new housing developments. Zoning has become more restrictive. Permitting has declined by an estimated 37 percentage points between 1960 and today. Bribery or other methods for persuading officials to permit developments have probably become less effective than in the 1960s, though there is little evidence either supporting or refuting this thesis. The fraction of Americans owning their own homes has risen in the past 40 years from 59 percent to 68 percent, giving homeowners more political clout. Rising education levels and learning from other political battles, such as the civil rights movement, have made community members more adept at using courts and the press to battle against developments. And, as afforded by rising incomes, there is a rising preference for living in low-density communities where crime rates can be lower and civic amenities better
-- David R. Francis