Why Have Housing Prices Gone up - Book Report/Review Example

Article Review: Why Have Housing Prices Gone Up? Summary of the article The housing prices in the United s has kept increasing from 1950, with the increase in the housing quality and the cost of constructions, as well as the regulatory cost requirements for building new houses being the major causes of the rise in the housing prices (Glaeser, Gyourko and Saks, 2). While the increased quality and costs of construction accounted for the higher percentage of the housing costs increment between 1950 and 1970, it is the costs of regulatory requirements that have caused the increment in the housing prices from 1970 onwards. The increment in the housing prices across 316 metropolitan regions of the continental United States has been 1.7% since the year 1950 to the year 2000. This increment has seen the cost of housing rise from $59,575 in 1950; when the dollar is modified to reflect the dollar value in the year 2000, to $138,601 by the year 2000 (Glaeser, Gyourko and Saks, 2). Nevertheless, there is a notable difference between the percentage increase in the housing prices and the standard deviation increase for the housing across the 316 metropolitan USA regions. Thus, while the average increase in housing prices has been 72%, the standard deviation increment has been 247% (Glaeser, Gyourko and Saks, 2). The gap between the median metropolitan area and the low costs has seen little change, while the gap between the median metropolitan area and the highest costs has registered great variances over the years. In 1970, the average prices of housing at the 90th percentile was 35% higher than the median metropolitan area, while in 1990, the average prices of housing at the 90th percentile was more than 50% expensive than the median metropolitan area (Glaeser, Gyourko and Saks, 2). The understanding of the changes in the housing prices has always been approached from the demand side, where the analysts considers housing demand factors such as per capita income and the interest rates, while ignoring the supply side of the market. However, the rise in the prices of housing does not only requires a rise in demand only, but that must also be accompanied by a restricted supply (Glaeser, Gyourko and Saks, 2). The limitation in the supply of housing is affected by three major factors, namely land, government approval and the physical structure. In this respect, the rising costs of housing cannot only be limited to the increased demand factor, but must also reflect the increment in the costs of land, increased costs of constructing the housing structure or increased costs of obtaining government approval for building the housing structure on land (Glaeser, Gyourko and Saks, 3). According to the data given in Table 1 by R.S. Means Company, summarizing the real value of construction costs per square foot for a modest-quality housing for a single family, the costs of constructing new housing and the average prices for the housing continued to increase simultaneously between 1950 and 1970 (Glaeser, Gyourko and Saks, 3). However, after 1950, the prices of housing continued to increase, even when the costs of new housing constructions was not increasing. For example, for the three decades spanning between 1970 to 2000, the increment t in the real costs of constructing new housing in San Francisco increased by 4.6 percent and the same in Boston increased by 6.6 percent (Glaeser, Gyourko and Saks, 3). However, the change in the overall housing costs in Boston was an increment of 127% for the three decades, while in San Francisco, the housing prices for the three decades increased by 270% (Glaeser, Gyourko and Saks, 3). The increased rate of home owners, compared to the house renters is a factor that has contributed to the decrease in the rate of production of housing units even when the physical constructions costs of housing structures has remained low, as represented by the formula aˆ(D) = F −1 (1− D/ N). In the last 40 years, the percentage of home ownership has risen by 59% to 60%, which then means that the cost of physical construction has been less (Glaeser, Gyourko and Saks, 14). After 1980, the average change in the physical costs of constructing the structure and the actual costs of housing presented a widening gap, especially in the big coastal metropolitan regions of San Francisco, Los Angeles, California, and San Diego (Glaeser, Gyourko and Saks, 4). Thus, after 1970, the non-physical costs of constructing a housing unit increased to account for over 40% of the total housing costs, with the physical costs of constructing a housing unit accounting for 53% of the total housing costs. This progressed until 2000, where the physical costs of constructing a housing unit in most of the metropolitan regions of the USA could not account for more than 60% the actual housing costs (Glaeser, Gyourko and Saks, 4). Most notably is the fact that the quality and the structural sizes were not increasing rapidly during the three decade period to account for the huge deviation in real construction costs increase and the actual costs of housing. The data from the Office of Federal Enterprise Housing Oversight (OFHEO) indicated that between 1980 and 2000, the changes in the quality of housing accounted only for less than 25% of the overall price increment of the housing. Further, the standard deviations data in Table 2 that measures the ratio of the average house price (P) against the estimated physical construction cost (CC) which was undertaken in 102 metropolitan regions of the USA between 1950 and 2000, has indicated that the physical costs of supplying a housing unit does not account for a high value of housing price increase (Glaeser, Gyourko and Saks, 3). The data in Table 2 providing the P/CC ratio indicates that 90% of the cost of housing was accounted for by the physical structures costs until 1970. The value of a housing unit is determined by the formula U(D) −U(N − D) + aˆ(D)/r, where D represents the housing units (Glaeser, Gyourko and Saks, 10). The P/CC ratios in 2000 indicates that the physical costs of constructing a house accounted for only 30% of the total housing costs in 102 metropolitan regions of the USA, which is very different when compared to the p/CC ratio in 1970, where the physical construction costs accounted for 90% of the total housing costs. According to Table 3, the expansion in the rate of new housing units production also changed drastically, with many metropolitan areas increasing the production of new housing units by between 20% and 60% in the 1950s, which reduced to only 10% annual new housing increment by 1990 (Glaeser, Gyourko and Saks, 6). Figure 4 shows that where the housing costs were higher than the average increase in the physical construction costs, the rate of new housing unit production was high. However, figure 5 shows that in the 1990s, a higher increase in the price of housing units compared to the actual physical construction costs does not lead to an increased rate of new housing unit production (Glaeser, Gyourko and Saks, 6). This result simply shows that government restrictions are playing an increased role in hindering the suppliers from responding to the increase in prices of housing where the physical costs of constructions are low, by building more housing units (Glaeser, Gyourko and Saks, 7). Therefore, the limitation in the supply of the new housing units has been a factor of the land and the cost of the right to build, in which evidence has shown that restriction in increasing the rate of new housing unit production is caused by the government restrictions. The Economics of Zoning and Permitting is a man-made restriction that has seen a reduction in the production of housing units even when the construction costs are low, due the need to regulate the ratio of town to reservation locales (Glaeser, Gyourko and Saks, 14). This is represented by the formula U(N − D), where U is the housing utility that is determined by N, representing new housing construction less the D, representing the already existing housing units (Glaeser, Gyourko and Saks, 9). The major factors that have contributed to the increased price of housing even when the physical construction costs are low is the government restriction, in form of the local authorities zoning and designating the regions as either town or reservation locales (Glaeser, Gyourko and Saks, 14). This restrictions have been supported by other components such as the judiciary tastes, where the judiciary failure to help the landowners overcome the restrictions to use their lands as placed by the local authorities (Glaeser, Gyourko and Saks, 16). The courts attitude has been friendlier to the anti-development desires of the middle-class that are environmentally sensitive, making the costs of obtaining authorization for new housing construction high, and thus limiting new housing constructions, while increasing the housing prices of the few housing units that are authorized (Glaeser, Gyourko and Saks, 15). The other factor that has contributed to the higher housing prices is the organization and political impact of local residents, who are well organized and have adapted the skills of using the media and the courts to restrict any construction they deem environmentally-unfriendly in their neighborhood. The political organization and skills for use of media and courts were way higher in 2004 compared to 1955 (Glaeser, Gyourko and Saks, 17). The ability to use cash to influence the authorization of housing construction has reduced drastically from 1960 to 2000, thus making it difficult for developers to bribe their way into constructing new housing units (Glaeser, Gyourko and Saks, 17). The reduction in the ability to produce new housing units has in turn contributed to higher housing prices. More attention is being paid to any corrupt deals by the media, thus minimizing the ability of developers to bribe authorities, while the public awareness of the environmental rights and protection needs has been increasing. All this contribute to low housing units production, and consequently higher housing prices. The increased housing prices has also been caused by increased income for the public, which then causes these categories to favor high amenity neighborhoods with low density housing (Glaeser, Gyourko and Saks, 18). Critical review The fundamental argument of this article is that the high prices of housing in America have been contributed to by the limited supply of housing, as opposed to the increased demand (Glaeser, Gyourko and Saks, 2). This observation holds true not only for the period between 1970 and 2000, but also even in the second decade of the 21st century, where according to an article published in The Wall Street Journal on July 17, 2014, the home prices increase has primarily been driven by the shortage of supply (Timiraos, n.p.). Therefore, where more homes are not made available for sale, there are higher chances that the housing prices could continue to outgrow the renting growth through to the year 2016, with the current growth in housing prices being 5% per annum (Timiraos, n.p.). The USA housing units have been overvalued by between 6% and 9.7% between 2011 and 2014, when compared to the households incomes, and the trend could continue through to the future, with an expected increase in the housing prices at around 3% annually for the next 2 years, such that by the end of the year 2016, the housing prices in the USA will be overvalued by 12% above the fair market value (Timiraos, n.p.). The argument that the shortage in supply of housing is the major cause of housing price increase has also been supported by Bloomberg Housing Statistics, which have indicated that there has been a decrease in the prices of housing in the USA in 2014 by a large margin, where the average price of a housing unit had declined by 8.8% by the month of May 2014, compared to the price of the same housing unit in 2013 (Coy, n.p.). According to these statistics, there has been an annual increase in the new housing unit production from 554,000 new housing units in 2009 to 927,000 new housing units in 2013 (Coy, n.p.). It is this increase in the supply of housing units that has led to the remarkable decrease in the housing prices in the USA in the year 2014, and the trend is set to continue with a predicted additional production of 200,000 new units every year for the next three years, which will then mean that the USA housing market will be adding 1.7 million new housing units by 2017 (Coy, n.p.). The consequence is that the housing prices will continue to go down, as the supply of housing increases into the future. However, the demand factor has also been considered as a major factor that has contributed to the increase in the housing prices in the USA. The fact that there are more eligible buyers of houses in the USA market compared to the available supply is a factor that has contributed to the increase in the housing prices (Guerra, n.p.). The demand factor is also contributed to by the income status of the individuals or the accessibility of the funding for home ownership. In the article, Glaeser, Gyourko, and Saks (2005) argued that per capita income and the interest rates are major factors that determine the housing prices in the USA p.2. It is this argument that has been reinforced by the Tony Guerra, who observes that the increased mortgage lending by the banks creates easy accessibility to home ownership funding, which in turn drives the demand of housing units higher than the available supply, causing the housing prices to increase (Guerra, n.p). The fact that the housing prices has been increasing over the years has been supported by an article published in the NBC News, which holds that the housing price increase can be accounted for by the fact that the demand for housing has been high compared to the supply, while the population has been growing exponentially compared to the increase in wages (Schoen, n.p.). Consequently, the available wages are not sufficient to meet the households’ consumption demands and create savings for purchasing or construction a house for the households. The exponential growth in the prices of housing has mostly been registered in the coastlines of the USA, where the housing costs have been found to increase by over 77% over the past decade (Schoen, n.p.). The mountain region has also registered an increased housing prices growth by a higher percentage compared to the rest of the regions, with an increase of the housing prices in the mountainous regions of Arizona and Nevada being 11% (Schoen, n.p.). This is relatively high compared to a slight increase in the housing prices at the Middle Atlantic region such as the New York, Pennsylvania and New Jersey, where the prices of housing were observed to increase by 2.5% only (Schoen, n.p.). This observation serves to reinforce the argument made by the article; that the cost of housing has been increasing due to the high demand of housing units in the regions of high amenities and low population density (Glaeser, Gyourko and Saks, 18). The other argument that had been put across by Glaeser, Gyourko, and Saks (2005), in the article is that the increased incomes for individuals has driven the prices of housing in the USA high, since the individuals with high incomes are increasingly favoring high amenity neighborhoods that have low-population and housing density, which in turn have high housing prices compared to the low-amenity and crowded neighborhoods p.18. This argument has been reinforced and validated by Tony Guerra, who observes that many individuals in the USA are seeking to buy homes in trendy neighborhoods, where the supply of such homes might be limited, thus driving the prices of housing in such neighborhoods high (Guerra, n.p.). This in turn also affects the pricing of the neighboring housing prices, eventually causing the prices of housing units in the USA to increase beyond their market fair value. Nevertheless, the argument that the shortage of housing has been the major cause of increasing housing prices as argued by article has been contested. While there is a general perception that the increase in the prices of housing in the USA has been as a result of shortage of housing unit, the reality is that the banks have contributed to the increased housing prices, through investing billions of dollars in the housing sector (Positive Money, n.p.). Banks have the ability to make money every time they give a housing loan or a mortgage to customers, due to the relatively high interest that is charged on such loans. Therefore, the banks have taken the advantage of this occurrence to issue loans and continuously make the lending terms more flexible, so that such loans can be accessed by a large number of people. For example, in the USA and UK, banks issued housing loans and mortgages continuously to many people during the period between 1997 and 2010 (Positive Money, n.p.). Consequently, the amount of money available for purchasing houses increased. This increased the demand of housing and consequently pushed the prices of the housing much higher. On the other hand, the interests that the banks were earning from the mortgage and the housing loans quadrupled for the same 13 year period running between 1997 and 2010 (Positive Money, n.p.). Therefore, it is the lending from the banks, more than the shortage of housing units that has caused the increase in the housing prices, since with the flexible lending terms and high amounts offered in mortgage and housing loans, more money is available for increasing the housing prices. Finally, Glaeser, Gyourko, and Saks (2005) argue that government restrictions have played a major role in the increase in the prices of housing units in the USA p.1. This argument has also been validated by the data from the National Coalition for the Homeless 2009 Report, whose findings indicate that declining public assistance from the government and the local authorities, coupled with an annual destruction of 200,000 housing units annually by the local authorities, has contributed to shortage of low-income housing, which has in turn driven the prices of housing in the USA high (NCH, n.p.). The report has also indicated that the federal support for low-income housing has declined drastically in the last two decades, where the federal housing support has declined by 49% between the year 1980 and 2003 (NCH, n.p.). Thus, the government restriction has been a major contributory factor to the increasing housing prices in the USA, which is the major argument of the article “Why Have Housing Prices Gone Up?” Conclusion The increase in the prices of housing in the USA has been contributed to by a multiplicity of factors. First, the high demand and the corresponding low supply of housing units in the USA has been a major factor that has contributed to the high price of housing. The other major factors that have contributed to the increased housing prices include government restrictions, increased incomes and accessible mortgage lending from the banks, as well as the need to own homes in the high-amenity and trendy neighborhoods. Works Cited Coy, Peter. “The Re-Explosion of U.S. House Prices Is Over”. Bloomberg Business week, July 01, 2014. Available at: http://www.businessweek.com/articles/2014-07-01/the-re-explosion-of-u-dot-s-dot-house-prices-is-over Glaeser, Edward L., Gyourko, Joseph and Saks, Raven E. “Why Have Housing Prices Gone Up?” American Economic Review, 95(2), 2005: 1-20. Print. Guerra, Tony. “What Causes Housing Prices to Rise in the United States?” Home Guides, 2014. Available at: http://homeguides.sfgate.com/causes-housing-prices-rise-united-states-56413.html National Coalition for the Homeless (NCH). Why Are People Homeless?, July 2009. Available at http://www.nationalhomeless.org/factsheets/why.html Positive Money. “Why are House Prices So High?”, n.d. Availabe at: http://www.positivemoney.org/issues/house-prices/ Schoen, John W. “Home prices across the US defy gravity”. NBC News, November 24 2014. Available at: http://www.nbcnews.com/nightly-news/rockefeller-family-leave-30-rock-n255376 Timiraos, Nick. “Forecast Says U.S. Home Prices Are Overvalued, Will Peak In 2016.” The Wall Street Journal, July 17, 2014. Available at: http://blogs.wsj.com/economics/2014/07/17/forecast-says-u-s-home-prices-are-overvalued-will-peak-in-2016/ Read More