Mon 30 Oct 2006

What goes down, must come up…I think it goes something like that? Peter Coy’s Boom! Bust! Boom? Check the history of housing busts. Some areas bounce back more strongly than others [BW]. The article deals with the concept of how quickly a market can return from a downturn.

How common is this boom-bust-boom pattern? Over the past three decades about 40% of housing busts in big metro areas have eventually been followed by strong recoveries. That’s according to a BusinessWeek analysis of inflation-adjusted housing prices. In an additional 15% of markets, prices adjusted for inflation barely got back to their previous peaks after 15 years. In the remaining 45% or so of markets, prices adjusted for inflation were still down a decade and a half after their pre-bust peaks.

According to Edward L. Glaeser, a Harvard University economist, whose work I admire especially his paper: Why is Manhattan So Expensive? Regulation and the Rise in House Prices [pdf] bases his thinking on restricted supply.

Markets with more zoning restrictions, less available land an other supply restrictions, may see more volatility in pricing, but are more likely to bounce back more quickly. In other words, although these markets may be more expensive to begin with but they generally have less speculation and more restrictive land use controls. As a result, they tend to bounce back sooner.

This article presents yet another argument as to why the US housing market cannot be looked at as one broad market despite the oversupply and high demand for articles that do just that.

4 Responses to “Restricted Supply Means Faster Return”

1. Sandy Mattingly Says:
   October 30th, 2006 at 1:07 pm

   Maybe there is undisclosed data behind the BW analysis, but I don’t see support for the view that prices are more volatile downward in certain cities, just that the recovery is quicker and larger in those cities (basically, cities in which supply is – in economic terms – artificially restricted).

   I can’t think of any logical reason why those cities should fall harder or faster than cities that crawled back from the last bust.

   This article meshed nicely with something I posted on my blog last week, positing that the costs of construction are more of a drag on price appreciation in cities in which construction is relatively easy (I picked Houston, as did BW), compared to New York City.

   So thanks for the additional fodder JM.

2. WT Economist Says:
   October 30th, 2006 at 3:52 pm

   NYC has the most liberal zoning in the United States. Period. You have to wonder what those complaining about zoning restrictions want.

   Go try to build a 6.0 FAR building with no parking in Darien. In fact, go try to build a two-family house.

3. Jonathan J. Miller Says:
   October 30th, 2006 at 3:59 pm

   Thats sort of out of context isn’t it? Apples and oranges, or perhaps dried bananas? While its true that small suburban communities around NYC have tough building restrictions, I think that primarily 1-family communities are resistant to multi-unit dwellings. Then why is the assemblage of development sites so difficult and expensive, require extensive consulting services including expeditors? There are many lawyers who specialize in zoning laws here.

4. BC Says:
   November 4th, 2006 at 2:06 am

   I remember that supply constraint article, and thought it had plenty of insights. Part of it is the standard observation about geographic restrictions — if you have a river to the east, west, and north, and a harbor to the south, the only way to build is up.

   What we’re seeing in Arlington, VA, a 25-square mile inner-ring suburb of DC, is regulations running amok. I attended a lecture by Enrique Norten last week who called for better urban design and fewer non-professional busybodies opining on architecture. What the council members heard was ‘create design regulations’, ‘require competitions for everything’, and ‘use LEED on all projects, even where inappropriate’.

   Great. We have a lack of new affordable dwellings, an excellent but shrinking school system, and county board members who conflate developers with Santa Claus. LEED is unofficially required on nearly every project now, and design elements or materials by proscription will lead to all sorts of unintended consequences. Affordable housing in Northern Virginia is hampered by the cost of land, construction, and lack of wage growth. Localities clamor for it, but they won’t alter their tax structure to favor this type of development.

   Sorry this turned into a rant on affordable housing, but its merely one more way that government ‘influences’ the cost, type, and location of development in somewhat nefarious ways.