NCPA - National Center for Policy Analysis


March 15, 2006

Why do houses cost so much when there's plenty of land to build on? Is public housing a good thing? Why do people still move to Detroit? Professor Ed Glaeser has some answers, says Jon Gertner (New York Times Magazine).

In the late 1990s, Glaeser, along with real-estate economist Joseph Gyourko, began thinking about the physical nature of places -- buildings, roads and buses -- and what kind of effect that had on a metropolitan area. They wondered why cities like Philadelphia and Detroit -- places with poor future prospects -- weren't doing even worse in terms of population; why didn't everyone leave and go to places like Charlotte, N.C., that has a fast-growing economy? The answer lies in the durable nature of housing itself; people can flee, but houses can take a century or more to finally fall to pieces, says Gertner.

According to Glaeser and Gyourko, it is extremely useful to consider the relationship between actual construction costs and the market price of homes:

  • The most important transformation in the American real-estate market has been changes in zoning regulations; zoning taxes have pushed prices far above construction costs.
  • Among the half-dozen leading economists who study housing supply, there seems to be wide agreement that regulations have had a tremendous effect on prices.

Moreover, consider New York City, where the price of an apartment was essentially the cost of building the next floor, says Gertner:

  • Over the past 30 years, the average height of new residential buildings in Manhattan decreased.
  • In 2004, one half or more of the value of condominiums in the borough could be thought of as rising from some type of regulatory constraint preventing the construction of new housing.

Source: Jon Gertner, "Home Economics," New York Times Magazine, March 5, 2006; based upon: Ed Glaeser and Joseph Gyourko, "Urban Decline and Durable Housing," Harvard University, August 2004.

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