April 25, 2018
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What’s not to like about stable housing prices

By Edward Glaeser, Bloomberg

The Case-Shiller Housing Price figures for March were released Tuesday, and they reveal a second month of modest price increases.

These slightly rising prices don’t portend a housing comeback. Instead, the seasonally adjusted figures illustrate that since March 2009, we’ve been bumping along the bottom of the housing market, just as we did for six years after the last housing bubble burst in 1991.

The two-month increase in the Case-Shiller 20-city index between January and March 2012 still leaves us only 0.2 percent above the post-2006 market bottom. In real terms, the 20-city index is about where it was in March 2000. The 10-city index, which goes back to the 1980s, is about the same today, in real terms, as it was at the end of the Ronald Reagan presidency. Let’s hope that U.S. homebuyers never again will believe the lie that housing is a fail-safe investment strategy.

On average, the Case-Shiller cities have housing values that are 90 percent of their values in May 2009, when the market hit its first bottom. After that, prices began rising, abetted by the homebuyer tax credit.

Fifteen of 20 Case-Shiller cities have prices today that are 83 percent to 97 percent of their May 2009 prices. Two cities, San Francisco and Washington, have done unusually well, with housing prices that essentially are unchanged from 2009. Three cities — Atlanta, Chicago and Las Vegas — have been poor performers, declining an additional 20 percent in real terms since then. Atlanta and Las Vegas were epicenters of overbuilding, and Las Vegas’s unemployment rate remains at 12.1 percent.

From 1992 to 2012, real housing prices shot up by more than 40 percent in Boston and Denver, and by about 30 percent in New York and Portland. Over that period, real prices fell by 26 percent in Atlanta, 30 percent in Detroit and 34 percent in Las Vegas. Long-term price growth appeared primarily in places with a skilled population and a shortage of new housing.

Among metropolitan areas with more than 1 million people in 2000, Boston and Denver were two of the 10 most-educated, with more than one-third of adults with college degrees. They also have a dizzying array of land-use restrictions that restrict supply. Portland, Oregon, also is known for its barriers to building.

Detroit and Las Vegas are among the least-skilled large metropolitan areas; only 16 percent of adults in Las Vegas had college degrees in 2000. Las Vegas was the easiest bubble to call, because there are few barriers to building in unincorporated Las Vegas and outside the urban core. The Atlanta area’s education base comes close to rivaling Boston’s, yet housing prices in the two areas have moved in opposite directions over the last 20 years.

Cheap homes make it easier for young families to buy. Given that our public policies tend to be rigged against the young, who will have to pay the cost for our current deficit and extraordinary spending on Medicare, I can’t begrudge them the benefit of lower housing prices.

In the long run, we should expect to see prices stay low in most of the United States. We have an abundance of land. The Census reports that there were 117 million households in 2010. So every household could have more than an acre of land and we’d all still fit into Texas.

I may cheer for affordable housing in the long run, but there is little doubt that falling housing prices played a crucial role in creating the recession. Too many of our financial institutions were long on housing-related assets, and when prices dropped, the entire system neared the edge of collapse.

The one sector that will not boom until housing markets come back is construction. From 2003 to 2008, the U.S. added 9.3 million units to its housing stock, and the number of vacant homes increased by 3.4 million. Construction can only come back when we work through that excess housing inventory, and that process has been slow. The rate of household formation was incredibly modest during the downturn, as young people increasingly chose to live at home. Eventually, though, construction will return to the level needed to satisfy the still growing U.S. population.

My greatest hope, however, is that prospective buyers have learned the lesson of the past decade: Housing prices go down as well as up. The right reason to buy a home is not as an investment, but as a place to live a fulfilling life.

Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.”

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