07/02/2022

Housing Was Undersupplied during the Great Housing Bubble

ust a few cities are at the heart of the housing supply problem, most notably New York City, Los Angeles, Boston, and San Francisco, which I refer to as Closed Access cities. There are two very different housing markets within the United States: the Closed Access market, where new housing is highly constrained, rents rise relentlessly, and households are forced to make difficult choices as housing expenses eat up their budgets; and the rest of the country, where homes can generally be built to meet demand, housing construction is healthy, and housing expenses remain at comfortable levels for the typical household.

If we add these two markets up into an aggregate market, it looks like a market where rents are relatively level over time. In the 2000s, when housing starts were rising and home prices were also rising to unusually high levels, it appeared as if those rising prices were unrelated to rent, and it appeared that prices were rising at the same time that supply was rising. This pattern, rising prices and quantities, seemed to be the result of excess demand—too much credit and too much money funding too much housing.

Yet few places fit that description. For the most part, there were places where housing starts were low, while rents and prices were both rising, and there were places where housing starts were healthy, while rent and price increases were moderate. If we compare median annual rent and median home price within each metropolitan area, it is clear that rents were an increasingly important determinant over the past two decades of home price differentials between different metropolitan areas. And as shown in figure 5, in this regard, the Closed Access cities have become outliers—much higher rents leading to much higher prices.

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