People expect the value of their homes to continually go up. But would it be better if home prices were not constantly rising? Perhaps. Rising prices have been a major generator of middle class wealth, but perpetually rising home prices keep more and more folks from being able to afford to buy.
What if we could solve the affordability problem by making homes more like other durable goods that don’t appreciate over time, and possibly decline in value? The argument made by economist Ed Glaeser and colleagues (NYTimes: Why Falling Home Prices Could Be a Good Thing) is that this would open homeownership to greater numbers of people, and that the way to achieve steady or declining prices is simple: to increase supply, and by a lot. This would ostensibly provide incentives for people to move from economically distressed regions, like Flint, MI, to more prosperous, job rich regions, like the San Francisco Bay Area. The assumption is that land use regulation is behind the unreasonably high home prices in places like the Bay Area, New York, and others.
I think they’re only part right, and mostly wrong. Yes, constrained supply raises home prices in metro areas with restrictive land use regulations. Whether it’s NIMBYism in trendy urban neighborhoods putting the kibosh on new apartment towers, or growth boundaries and other sprawl-containment strategies like agricultural zoning, the rules of supply and demand are definitely a factor.
But land use regulation is not the primary driver of overpriced housing. Two counties with the most restrictive land use in the US – Lexington-Fayette, KY, and Baltimore County, MD – rank nowhere near the most expensive regions in the US and aren’t on any lists of places with overpriced housing, certainly not on the scale of, say, New York and San Francisco. No, the right question to ask is: is the metro area in question a magnet for highly educated and highly paid talent? In the United States, there are a handful of metro areas that meet this qualification: New York (finance and banking, media and publishing, marketing, the arts, etc.); San Francisco Bay Area (high technology); Washington (government and military); Los Angeles (entertainment); Boston (elite universities, biomedical research and technology), and a few more honorable mentions. What binds these disparate places together is that they have attracted a disproportionate share of wealthy people who are willing to pay through the nose to be in these locations. Assuming that it’s even logistically possible to construct all of the housing needed to lower costs to the point of accessibility for the middle class, the amount of housing that would need to be constructed in order to lower home prices to levels commensurate with the national average is absurdly high. Furthermore, the study fails to account for the relative _desirability_ of metro areas. There are simply far more affluent and educated people who want to be in New York, Boston, Washington, San Francisco, and Los Angeles than in, say, Milwaukee.
There are many fast-growing metro areas that are often cited as paragons of American prosperity. But the home prices in these places varies widely, depending on just whom exactly is flocking there. Consider Austin and Denver, two high-growth metros with little significant land use restrictions to supply. Their home prices are appreciating rapidly as more and more affluent, educated people move in to fill corporate and tech jobs. Houston and Oklahoma City, by contrast, are also growing quickly, but their home prices are growing far less quickly, largely on account of attracting many lower-skilled, lower-paid workers for the oil and gas industries that predominate those regions. While Austin and Denver may gradually join the ranks of America’s high-cost talent magnets, the fate of Houston and Oklahoma City, tied largely to fossil fuel extraction, may also grow indefinitely, but are eventually fated to join Rust Belt metros too dependent on a single industry nursing blue collar workers.
Ultimately, home prices are whatever the market will bear. If home prices are too high in elite coastal cities, then people will stop buying them.