I don't think anyone bought my explanation of the housing bubble. I'll make one last go of it. This time I'll try an appeal to authority.
Urban economists Ed Glaeser and Joseph Gyourko have just published a short e-book (pdf) entitled Rethinking Federal Housing. The book is mostly about, well, federal housing policy, with an emphasis on policies for making housing more affordable in some of the nation's most expensive markets. A good chunk of the book focuses on the culpability of some local governments for high home prices.
While browsing the book last night, I was delighted to come across this passage, which more or less matches the argument I've been running the last few days:
While demand-side policies can increase the volatility of housing prices, policies that make supply more elastic can reduce that volatility. Housing prices are much more volatile in markets where supply is constrained by regulation (Glaeser, Gyourko, and Saiz 2008). In well-functioning markets,both price and quantity can adjust to changes in demand conditions. In supply-constrained markets, most of the adjustment occurs in the price of housing because stringent land-use regulations make it too costly to change the quantity of housing very much. The absence of supply adjustment makes these markets more volatile over time, both on the upside and downside of the cycle. Hence, housing supply restrictions, not just problems in the mortgage market, help account for the magnitude of the price movements that we see in the nation’s coastal markets especially.
Glaeser, Gyourko, and Saiz (2008) argue that price bubbles are more likely to form in highly regulated markets because a very tight, or inelastic, supply of homes is needed to support the increasingly large price increases that sustain a bubble whenever demand is rising. It is more difficult for home prices to become disconnected from their fundamental production costs in markets where plentiful supply is forthcoming whenever prices rise much above those costs. In fact, housing construction jumped during the housing boom of the early to middle 1980s in these more elastically supplied markets such as Atlanta, and prices remained quite close to production costs throughout the cycle. It was the level of construction activity, not prices, that varied most over the cycle in the freer, more unregulated markets. The more recent boom did see a few such markets (e.g., Orlando, Phoenix, Las Vegas) experience temporary price jumps, but the length of their booms still is much shorter than in the more tightly regulated, supply-constrained coastal markets. Between 1996 and 2006, average real house price growth was forty-seven percentage points greater in the more supply-constrained markets: 81 percent real appreciation in the constrained markets versus 34 percent in the less-constrained ones.
The recent boom was widespread, but it was also much larger in the more regulated coastal markets, which indicates that housing supply conditions, not just demand factors associated with incomes and mortgage markets, play an important role in accounting for the very nature of booms and busts in different areas of the country. This also suggests that sound policy to counter overly restrictive local regulation of new construction can have benefits beyond those directly associated with making housing more affordable.
(See pp. 2-3; emphasis mine).
I don't think any sensible person would argue that land-use regulations in the coastal markets alone caused the bubble. But they played an important role.
