Why Falling Home Prices Could Be a Good Thing
If Americans viewed housing as what it essentially is, a consumable good, solutions to our ongoing affordability crisis might just present themselves. And we'd probably loosen a lot of land use regulations.
If we didn't consider homes an investment, Conor Dougherty writes, "People might expect home prices to go down instead of up. Homebuilders would probably spend more time talking about technology and design than financing options. Politicians might start talking about their plans to lower home prices further, as they often do with fuel prices."
The piece draws from several studies, including one that finds "a standard American home should cost around $200,000, a figure that includes the cost of construction, what land would cost in a lightly regulated market, and a modest profit for developers." Another quotes the economic loss from local land use regulations at $1.5 trillion. 1
In this thought experiment, housing prices would probably adjust. They would be somewhat cheaper in most places, where population is growing slowly. But they would be profoundly cheaper in places like super-expensive San Francisco.
That was the conclusion of a recent paper by the economists Ed Glaeser of Harvard and Joe Gyourko at the Wharton School of the University of Pennsylvania. The paper uses construction industry data to determine how much a house should cost to build if land-use regulation were drastically cut back. Since the cost of erecting a home varies little from state to state — land is the main variable in housing costs — their measure is the closest thing we have to a national home price.
According to them, a standard American home should cost around $200,000, a figure that includes the cost of construction, what land would cost in a lightly regulated market, and a modest profit for developers. In many places, that’s what the prices roughly are. But for a few metropolitan areas like San Francisco and Boston, homes are wildly overpriced, leading to distortions in the economy and labor market.
We would still see homes of different sizes and styles — condos in some places, single-family homes in others — depending on the market in each city. A New York home would be smaller than one in, say, Houston.
So let’s carry on with this hypothetical. Say we opened the floodgate of development. What kind of effects could we expect? The economy would grow, and by a lot. According to a recent paper by the economists Chang-Tai Hsieh, from the University of Chicago’s Booth School of Business, and Enrico Moretti, from the University of California, Berkeley, local land-use regulations reduce the United States’ economic output by as much as $1.5 trillion a year, or about 10 percent lower than it could be.
That is a theoretical figure that includes easy-to-see things like increased sales of building materials and more jobs for construction workers. Most of the increase, however, would come from more abstract gains like increased wages for people who are willing to move from an economically distressed city to a faster-growing economy elsewhere, but are currently unable to because housing is too expensive.
Over time, the accelerated pace of building could lead to a long-run deflation in home values. But for the most part that would be limited to a few coastal cities. And while the older homeowners there would most likely be resentful of all the new apartments, condos and townhomes that caused their home equity to shrivel, younger people would have an easier time getting started.