What's driving up housing prices in big cities?

July 20, 2005 11:59 AM

Ignoring the housing bubble for a sec, what's driving constant increases in housing prices in major urban areas? (LA, NYC etc)

It seems to outpace every measure it should be correlated with. Is it driven by shifts in the relative allocation of wealth? (lots of Gen X yuppies?) Do more rich people want to live in cities now? (reverse white flight?) What?

posted by lbergstr to Society & Culture (21 answers total)

Best answer: According to this Harvard Institute of Economic Research paper,

"Between 1950 and 1970, this increase reflects rising housing quality and construction costs. Since 1970, this increase reflects the increasing difficulty of obtaining regulatory approval for building new homes."

posted by mbrubeck at 12:15 PM on July 20, 2005

On top of the above, what is really driving the current (astronomical) price inflation, is the expectation that real property will continue to appreciate faster than inflation. This leads to the sense that one's property is not only a place to live, but an investment, and the surest way to accumulate wealth.


And, if you go by history, this is true. But with the median price of a house in California now at $445,000 (up 4.% from May!), the rate of appreciation might be under some pressure in the near future: Greenspan was actually explicitly addressing the likely prospect of decreases in housing prices.

I live in Orange County, California. If I bought a median-priced house when I moved here in 2000, and sold it today, I would have realized a gain of more than $200,000 (and had a place to live in the interim). Try saving that much money if you are earning a salary!
posted by curtm at 12:33 PM on July 20, 2005

Some of it for NYC, LA, SF is just that housing stock hasn't kept up with demand for housing. In other cities, it's kept up just fine, which is why million-dollar houses in SF go for $100K in Buffalo or Pittsburgh, or for $150-250K here in D/FW.

At the same time, I don't think you can just ignore the bubble factor. It looks like a lot of the recent buying hasn't been people living in the houses but people buying them as, well, they'd call them investments, but as speculation. Hence, a bubble. You can also see this in homes selling for far higher monthly payments than it would take to rent the same or similar home.
posted by ROU_Xenophobe at 12:37 PM on July 20, 2005

Best answer: According to the contractors in my family, the costs of constructing a new residence within increasingly restrictive codes is rising faster than the cost of building materials. They claim that in larger markets, just paying the code experts (on staff or consulting) contributes almost 10% of total cost.

Also, this fad of floor plans featuring multiple split levels and complex rooflines contributes its own share in terms of increased labor costs.
posted by mischief at 12:56 PM on July 20, 2005

I do think that an awful lot of it is location. People want to live in the places you've listed, and there are only so many places available. In very large urban areas this might seem strange, but when you break it down by school district it is quite easy to see this at work. Here in Baltimore, where housing prices are still relatively reasonable, there are only a few neighborhoods in the city that are becoming prohibitive, and many of them have decent schools. The rest of the schools just suck.
posted by OmieWise at 12:56 PM on July 20, 2005

If we, as you say, put aside the bubble it is really very simple: The number of people is going up and the amount of land in certain desireable locations is remaining constant. Supply and demand. Population increases, amount of area in the San Francisco peninsula remains the same. Ditto for other desireable locations.
posted by Justinian at 1:12 PM on July 20, 2005

Building new housing (in lofts and such) is unbelievably expensive. Usually the existing building and land are relatively cheap, especially in blighted areas. To build everything to code makes the prices not look so bad. Notice how in much of suburbia there isn't a similar astronomical pricing increase. It only seems to be happening in areas where land is supreme. I believe most prices are artificial, in the since they are driven by governmental regulations and not "natural" capital forces.
posted by geoff. at 1:26 PM on July 20, 2005

I don't buy that the overall demand for shelter is driving the massive appreciation in prices. If that were the case then rents would be increasing in lock step with purchase prices.

Rents are flat to declining everywhere.

The most significant factor driving housing prices now is low interest rates, lax lending standards (anyone who can fog a mirror can get a mortgage) and the general belief that real estate is the best investment right now.
posted by de void at 2:06 PM on July 20, 2005

Don't forget the great paradox of urban "affordable housing": housing projects, rent control, income-limited units, and anti-gentrification policies are a windfall to those who get on the list, and a costly disaster for everyone else, both in terms of supply withdrawn from the market, and expensive mandates added to new construction.
posted by MattD at 2:07 PM on July 20, 2005

Population increases, amount of area in the San Francisco peninsula remains the same.

But the population of the San Francisco MSA has been basically constant for 10 years, and very slightly declining since 2000. Since 1970, population of the San Francisco MSA has only gone up ~15%. Population of San Francisco city/county has been likewise basically flat.
posted by ROU_Xenophobe at 2:10 PM on July 20, 2005

That's exactly my point, esteemed Rapid Offensive Unit. Observe:

What I think you are overlooking is that San Francisco MSA has some downright draconian zoning laws. The population simply cannot go up that much compared to other areas because you just plain can't build high density housing. The population is as dense as it is allowed to get, by law. But since the number of people who want to live there is going up... and enough additional housing can't be built BY LAW, the prices skyrocket.

It follows logically. More and more people wan't to live there. But zoning laws prevent anyone from building much high density housing to allow a higher population to live there. So, population stays roughly the same but prices go WAY up.

Quad Erat Demonstrandum.
posted by Justinian at 3:42 PM on July 20, 2005

Rents are flat to declining everywhere.

I live in West LA, and I can assure you that this is not the case. My rent just went up, and everything else in the area is more expensive than when I moved in a year ago - I checked =/.

That aside, the owner of the condo I'm renting also owns the condo next door. He paid $260k each in 2003, and is currently selling the unit next door to me for $500k.

This really does seem to be a case where there's a ton of people moving IN to the area - the area is not magically getting any bigger, or suddenly having a glut of new apartments/condos/houses added.

The new construction here is all about 60 miles to the east in the "Inland Empire." My parents bought a house there in 1994 for $135k - it's now worth about $400k and still rising. And this is in an area where there IS open land, and it IS under active development. They just can't build em fast enough.
posted by DoomGerbil at 3:48 PM on July 20, 2005

But since the number of people who want to live there is going up...

You got any data on that, or are you just assuming that from the rising prices? The broader area doesn't seem really consistent with that story, since even the CMSA -- which goes pretty far away -- has only grown by 12% since 1990, hardly an earth-shattering, price-busting increase.

The increases still seem more consistent with a plain-old speculation bubble than anything else, though I'd never expect homes in SF, LA, or San Diego to be as cheap as homes in Buffalo or Urbana.
posted by ROU_Xenophobe at 4:15 PM on July 20, 2005

But the question was to put aside the bubble. Of course there is bubble speculation driving a lot of price increase, but I thought the point of the question was what ELSE was driving it?
posted by Justinian at 4:53 PM on July 20, 2005

Also, this fad of floor plans featuring multiple split levels and complex rooflines contributes its own share in terms of increased labor costs.

I'm live in a large 100+ year-old house with a decently complex floor plan and an interesting (tin) roof line. My homeowners insurance estimates that the cost to completely rebuild the house as-is at around $250,000. It doesn't seem that the cost of marterials and labor begin explain housing costs appreciation.

I know that locally, all of the old urban neighborhoods are seeing tremendous appreciation as restoration has reached a certain momentum. Interestingly, there may be less people living in the areas now as families are replaced by couples and singles.

Another factor (around here anyway) is that much of the urban property was underappreciated/undervalued after the 40+ years that encompassed white flight and the crack epidemic.
posted by john m at 5:02 PM on July 20, 2005

"It doesn't seem that the cost of marterials and labor begin explain housing costs appreciation."

You are talking about about a one-time build, not a multi-unit development.
posted by mischief at 5:14 PM on July 20, 2005

You are talking about about a one-time build, not a multi-unit development.

We make the same point, I think, but I didn't really say it very clearly. I was thinking that if you could recreate a old majestic house (hardwood floors, tin roof, etc) like this for only $250k, than parts/labor on the vinyl McMansions would be even less.
posted by john m at 6:24 PM on July 20, 2005

Interest-only loans, 40-year mortgages and other financial tricks to help people qualify for more mortgage debt are fueling the increase of housing prices in some areas. Given limited housing supply in a desirable region and high demand in the housing market, people are pulling out all the stops to be the highest bidder. By going further into debt than they could have 10 years ago they can place the highest offer for the house of their dreams. This drives housing prices up, but it also creates a situation where a new buyer must be insanely wealthy or must be willing to go to the same financial lengths as everyone else to get into a house.
posted by rhiannon at 7:30 PM on July 20, 2005

What about the theory that 'X' will sell for "whatever the market will bear?" I know I'm not any richer (perhaps to the contrary) over the past several years, and I think many others would also not place themselves such, but are the upper-middle and upper classes getting richer/making more money (even adjusting for inflation etc.)? If the people who want to buy homes will pay $500,000, why not charge $500,000? Throw into the mix a general dependance on credit; a lack of good common (financial) sense in considering the overall cost of that mortgage/car loan/boat loan; the feeling that the "American Dream" means you have to have the biggest and most expensive everything (can't just keep up with the Joneses, gotta beat 'em). Why are houses so expensive? In short, because people will and do pay those prices.

(On preview - yeah, like what rhiannon said)
posted by attercoppe at 8:25 PM on July 20, 2005

Also, cost to rebuild != retail price.
posted by mischief at 10:34 PM on July 20, 2005

the cost to rebuild + the cost of the land should equal the retail price.

Warren Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."


posted by malp at 9:01 AM on July 21, 2005