Kevin Erdmann, whose comments on this blog are much appreciated, wrote
There wasn’t even a housing boom. We all just decided to freak out about the one type of homebuilding that was growing – single family units for sale – and ignore every single other category of housing supply, which included homes built by owner, multi-unit homes, and manufactured homes. All of those categories had been in decline. Of course, it was the decline that created the illusion of a boom, because it was precisely those cities where we can’t build, yet where income opportunities are available, where home prices were skyrocketing, because households were bidding up the stagnant pool of homes in those cities in an attempt at economic opportunity in a country that has become inflexible.
What I think he is saying is this (and I could be wrong in my characterization):
1. Because of natural and artificial constraints on supply in cities like SF, the housing stock stays just about fixed, so any increase in demand shows up in price.
2. People have to live somewhere. When supply is fixed in some places, some households get pushed to other places. However, the rise in supply in those other places was never much ahead of demand.
3. If there were excess supply, we would expect rents to fall, and they have not.
4. The sharp fall in house prices came from tightening mortgage credit by much more than was necessary.
My own thoughts:
1. A fact that is salient to me is that the share of mortgages for non-owner-occupied homes went from about 5 percent before 2004 to at least 15 percent in 2006. To me, this says that at the margin there was some demand that was not driven by housing needs. Also, I believe that in housing the marginal supplies and demands exert big effects on prices, even though those marginal Q’s are small relative to the stock of housing and the total number of household.
2. Another salient fact is that the average price-to-rent ratio also shot up over this period.
3. This suggests to me that something other than “pure” supply and demand was at work in driving up house prices. I am inclined to see some combination of looser credit and (unrealistic) expectations for house price increases.
4. I think that Kevin is right to stress that the characteristics of housing markets differ in different locations. In SF or DC, rapid gentrification combined with restricted supply gives you one dynamic. (I don’t think I would pin it all on people bidding for “an attempt at economic opportunity,” as if these cities offer better jobs to people of every skill, which is what Enrico Moretti has claimed. Instead, I see a shift in economic opportunity inside cities away from low-skilled workers and toward professionals in the New Commanding Heights sectors.) In rural Ohio, a long decline in economic opportunity gives you another dynamic. In Texas, a big population inflow with more elastic supply gives you yet another dynamic. I could imagine that national averages, including the national averages I tout as “salient facts,” could be quite deceiving. Perhaps to understand the whole you need to study the parts.