The Federal Housing Finance Agency recently published a working paper where they looked at within-city house price gradients for a selection of US cities over a 40 year period. The goal of the study was to address what they call a “persistent blind spot” in local house price measurements.

Here is their diagram showing annual average real appreciation from 1990 to 2015 for 9 US cities: 

The darker areas indicate more appreciation. They are generally clustered around each city’s CBD.

And here is an excerpt from the paper’s conclusion:

“In an area with a highly elastic housing supply, a permanent housing demand shock is first capitalized into prices, but over time as quantities adjust, prices return to pre-shock levels (see Glaeser, Gyourko, Morales, and Nathanson, 2014). In contrast, near the CBD, where buildable sites are less available and regulation is presumably more onerous, a permanent demand shock can outpace supply responses, leading to permanent price increases.”

What stood out for me was this last sentence. It’s a reminder of the perfect storm that many cities now find themselves in.

When everyone wanted to live in the suburbs, it was fairly easy to just build more homes. Supply was relatively elastic. And this kept prices in check.

However, the same is not true for city centers. Supply is relatively inelastic, meaning it’s much harder to build more homes when demand increases. And demand has been increasing.

So what we have today is a situation where many central cities are operating with basically a perpetual supply deficit. Hence the the comment about “permanent price increases.”

I don’t want to oversimplify the situation, the potential solutions, and/or the well-documented mistakes, but there was arguably a middle class price benefit to mass produced sprawl.

What should we be doing today to address housing affordability concerns?

The Federal Housing Finance Agency recently published a working paper where they looked at within-city house price gradients for a selection of US cities over a 40 year period. The goal of the study was to address what they call a “persistent blind spot” in local house price measurements.

Here is their diagram showing annual average real appreciation from 1990 to 2015 for 9 US cities: 

The darker areas indicate more appreciation. They are generally clustered around each city’s CBD.

And here is an excerpt from the paper’s conclusion:

“In an area with a highly elastic housing supply, a permanent housing demand shock is first capitalized into prices, but over time as quantities adjust, prices return to pre-shock levels (see Glaeser, Gyourko, Morales, and Nathanson, 2014). In contrast, near the CBD, where buildable sites are less available and regulation is presumably more onerous, a permanent demand shock can outpace supply responses, leading to permanent price increases.”

What stood out for me was this last sentence. It’s a reminder of the perfect storm that many cities now find themselves in.

When everyone wanted to live in the suburbs, it was fairly easy to just build more homes. Supply was relatively elastic. And this kept prices in check.

However, the same is not true for city centers. Supply is relatively inelastic, meaning it’s much harder to build more homes when demand increases. And demand has been increasing.

So what we have today is a situation where many central cities are operating with basically a perpetual supply deficit. Hence the the comment about “permanent price increases.”

I don’t want to oversimplify the situation, the potential solutions, and/or the well-documented mistakes, but there was arguably a middle class price benefit to mass produced sprawl.

What should we be doing today to address housing affordability concerns?