NCPA - National Center for Policy Analysis

Housing Affordability

July 18, 2003

Some advocacy groups claim that America faces a nationwide housing affordability crisis, and that the solution is increasing the supply of housing. However, economists Edward L. Glaeser and Joseph Gyourko say two issues are being confused: poverty and housing prices.

Housing advocates define affordable housing as that which can be purchased with a fixed percentage of income. However, if a family's income is too low to make rent or mortgage payments, that means they are relatively poorer, say the researchers, not that prices are too high.

It is more relevant, they say, to compare prices to the physical cost of new construction. Restricting their analysis to single-family homes, they found:

  • In most of the United States, home prices appear to be close to the physical costs of new construction.
  • In some parts of the country, home prices are far below new construction costs.
  • In only a few particular areas -- New York City and California, for example -- are housing prices substantially above construction costs.
  • Even in areas with high home prices, a house on a 10,000 square foot property costs about the same as a house on a 15,000-square-foot lot, and although prices are higher for lots with a view, land is generally 20 percent to 40 percent of the home price.
  • High prices are not necessarily associated with extremely high density -- for example, there is as much land per household in San Diego (a high-priced area) as there is in Cleveland (a low-priced area).

However, restrictive zoning is associated with high home prices, suggesting that local government regulation is the main cause of higher home prices in some areas.

Source: Edward L. Glaeser and Joseph Gyourko, "The Impact of Building Restrictions on Housing Affordability," FRBNY Economic Policy Review, June 2003, Federal Reserve Bank of New York.

 

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