NCPA - National Center for Policy Analysis


October 12, 2005

House prices in many communities, especially in urban areas on the East and West coasts, have soared in recent decades. A new paper from the National Bureau of Economic Research says that increased regulatory barriers are to blame.

The authors analyzed 316 metropolitan areas of the continental United States, where the average home price increased 1.7 percent faster than general inflation. They find that:

  • Prior to 1970, structure costs represented about 90 percent of the value of a home in most areas, but since 1980, the cost of land and obtaining regulatory approval has shrunk the importance of building costs as a factor in home prices.
  • In the Northeast Corridor, the non-structure component of house value exceeded 40 percent by 1990.
  • By 2000, this pattern had spread to 27 metropolitan areas, including San Francisco where structure costs represent no more than 30 percent of home value.

The evidence points toward a manmade scarcity of housing because the supply has been constrained by government regulation as opposed to fundamental geographic limitations, especially in the last two or three decades, say the authors. For example:

  • Judges and local government officials have become increasingly sympathetic to community and environmental concerns with new housing developments.
  • Permitting has declined by an estimated 37 percentage points between 1960 and today.
  • Zoning has become more restrictive.

The authors argue that a main cause of this burst in legal barriers is that the fraction of Americans owning their own homes has risen in the past 40 years, giving homeowners more political clout. Additionally, rising education levels and other political battles have made community members more adept at using courts and the press to battle against developments.

Source: David R. Francis, "Manmade Scarcity Drives Up Housing Prices," NBER Digest, September 2005; based upon: Edward Glaeser, Joseph Gyourko, and Raven Saks, "Why Have Housing Prices Gone Up?" National Bureau of Economic Research, Working Paper No. 11129, February 2005.

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