I have been gone for a good while, on a trip to the Adriatic Coast (Slovenia, Croatia, Montenegro – amazing places!) and then a family get together. At last, I’m back and time to write again!
I saw this a while back and have wanted to post about it, finally getting the opportunity to do so. It’s the best empirical study I’ve seen yet about what the primary causes are of the housing shortage and increasing housing prices we’ve been seeing.
The paper is one in the series of working papers of the National Bureau of Economic Research. Through data and extensive analysis, it really lays out a convincing case.
A review of the paper in the American Enterprise Institute AEIdeas blog by James Pethokoukis says the following:
Developers now build far fewer homes even when prices signal strong demand. … Cities that once responded to housing shortages by rapidly increasing construction now build only a fraction of what market conditions would historically have triggered.
The cause? Pethokoukis cites from the study:
The culprit isn’t land scarcity. These cities remain surrounded by vast open spaces. Instead, existing homeowners have become adept at using zoning laws and permitting processes to block new construction, protecting their property values while locking out newcomers.
The research here demolishes the notion that this housing supply crisis stems from the aftermath of the Global Financial Crisis. This unwelcome convergence began in the 1980s and 1990s, suggesting decades of accumulated dysfunction. Coastal housing restrictions were once an expensive quirk. Now they’ve gone viral, spreading to previously responsive markets nationwide.
How do you go about documenting that? This is where study, titled AMERICA’S HOUSING SUPPLY PROBLEM: THE CLOSING OF THE SUBURBAN FRONTIER? does yeoman work. After establishing through data analysis that relatively less housing is being built now than in the past, and that the cost of that housing is rising much more rapidly than the rate of inflation, the authors (Edward L. Glaeser, Harvard University Department of Economics, and Joseph Gyourko, University of Pennsylvania) do analysis on potential causes for the slowdown in homebuilding.
They look at potential causes for the price increases, such as lack of available land, cost of materials, availability and cost of labor, and status of the building industry. While these factors all play a role, it is variable in different markets and does not correlate all that strongly with the consistent increase in housing price.
The factor that seems to correlate most strongly with the increase in housing cost?
Where did the empirical housing supply curve flatten most sharply? Variables such as the Wharton Residential Land Use Regulatory Index (WRLURI) that measure the strictness of land use regulation reliably predict the shift. The share of educated workers in the metropolitan area, which is also thought to drive land use regulation, is also correlated with the change. We provide no further evidence that land use regulation has led to the change in housing supply, but we believe that this is the most natural explanation for the shift.
What is the WRLURI? Here’s a description from an earlier NBER paper:
…we report results from a new survey of the residential land use regulatory environment in more than 2,450 primarily suburban communities across a wide array of metropolitan areas throughout the country. We construct a measure of regulatory restrictiveness called the Wharton Residential Land Use Regulatory Index (WRLURI). … Our index methodology provides a convenient way to rank individual communities and markets in terms of their regulatory restrictiveness. …
Wow. So, according to this paper, the most correlated factor to the rise in housing prices is the strictness of local land use regulations, and the education level of the residents in the community (which means they know how to work the system to challenge and delay land use decisions).
Read it and weep, planners!