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Ed Glaeser and Housing Price Appreciation

Mark Thoma directs us to:

Economist's View: [A]n interesting NY Times article on Edward L. Glaeser, an urban economist at Harvard:

Home Economics - New York Times : By JON GERTNER: Edward L. Glaeser grew up on the East Side of Manhattan, went to school in Princeton, N.J., and Chicago, lived for a time in Cambridge, Mass., and Palo Alto, Calif., and recently moved with his wife and young son to a house on six and a half acres in the affluent suburb of Weston, Mass. To Glaeser, this last move has been a big adjustment. For one thing, he is not a good driver, and the new commute has prompted him to leave his house by 6 a.m. so as not to get ensnared in the morning rush hour. For another, Glaeser and the suburbs are clearly an unholy marriage of sensibilities, especially since his new house is bordered by about 600 acres of conservation land. "I wake up every day, thinking, My goodness, how many units of housing could you build here?" he says. Glaeser is a creature of density. An economist at Harvard, he has spent almost his entire professional life walking around, and thinking about, cities -- seeking explanations why some metropolitan areas thrive and some suffer and what factors make some places pricey and some cheap. He is just 38. In the years since earning his Ph.D. at the University of Chicago, though, he has been prolific and provocative in a way that has left many of his colleagues awestruck. "I think he's a genius," says George Akerlof, an economist at the University of California, Berkeley, who was awarded a Nobel Prize in 2001....

Glaeser's recent work on real estate addresses the issues of supply rather than of demand. He is far more interested in the forces shaping land development and residential building in the United States than in the forces shaping buyers' motivations and actions. He views supply as crucial to appreciating what has happened to the U.S. real-estate market over the past 30 years. A few months ago, he traveled from his Harvard office to the Massachusetts State House, near Boston Common, to discuss with the leaders of the State Legislature a research project he had just completed on the local housing market. Between 1980 and 2000, four of the five cities in the U.S. with the fastest-growing housing prices were in Boston's metropolitan area: Cambridge, Somerville, Newton and Boston itself. (Palo Alto had the second-fastest-rising prices over that time.) Glaeser and several colleagues considered two explanations. First, the possibility that builders in the metro area were running out of land and that home prices reflected that scarcity. The second hypothesis was that building permits were scarce, not land. Had the 187 townships in the metro area created a web of regulations that hindered building to such a degree that demand far outstripped supply, driving prices up?

Almost as a rule, Glaeser is skeptical of the lack-of-land argument. He has previously noted (with a collaborator, Matthew Kahn) that 95 percent of the United States remains undeveloped and that if every American were given a house on a quarter acre, so that every family of four had a full acre, that distribution would not use up half the land in Texas. Most of Boston's metro area, he concluded, wasn't particularly dense, and even in places where it was, like the centers of Boston and Cambridge, there was ample opportunity to construct higher buildings with more housing units.

So, after sorting through a mountain of data, Glaeser decided that the housing crisis was man-made. The region's zoning regulations -- which were enacted by locales in the first half of the 20th century to separate residential land from commercial and industrial land and which generally promoted the orderly growth of suburbs -- had become so various and complex in the second half of the 20th century that they were limiting growth. Land-use rules of the 1920's were meant to assure homeowners that their neighbors wouldn't raise hogs in their backyards, throw up a shack on a sliver of land nearby or build a factory next door, but the zoning rules of the 1970's and 1980's were different in nature and effect. Regulations in Glaeser's new hometown of Weston, for instance, made extremely large lot sizes mandatory in some neighborhoods and placed high environmental hurdles (some reasonable, others not, in Glaeser's view) in front of developers. Other towns passed ordinances governing sidewalks, street widths, the shape of lots, septic lines and so on -- all with the result, in Glaeser's analysis, of curtailing the supply of housing. The same phenomenon, he says, has inflated prices in metro areas all along the East and West Coasts....

"He doesn't wake up in the morning and say, 'My agenda is to fight government,"' says his Harvard colleague Martin Feldstein, an economist long in favor of privatizing Social Security and who, you might argue, knows what it's like to wake up with that agenda. While Glaeser admits to a libertarian bent, with a preference for market solutions over government solutions (he calls rent control "bad, bad, bad"), his inconsistencies are such that his colleagues disagree over whether he comes from the political center or the right. Certainly no one accuses him of being a lefty. But Glaeser has many admirers, and several research collaborators, on the liberal end of the spectrum; he likewise displays an odd enthusiasm for progressive efforts like those by London's mayor, Ken Livingstone (Glaeser affectionately calls him by his popular nickname, Red Ken), who imposed a stringent "traffic tax" on vehicles in the center city to reduce congestion....

My two cents are that there are two things going on here. First, there is the transformation of local governments--especially local governments of neighborhoods made up of detached houses--from machines to enrich developers via new construction to machines to enrich homeowners by generating upward pressure on house prices.

Second, there's a version of the "limited land" hypothesis: starting around 1970, many of America's metropolitan areas filled up in the sense that there was no longer greenfield land within less than half an hour's commute of anywhere you wanted to go. (New York is different, and was different for a long time.) Before 1970 being within half an hour's commute isn't valuable--it's there for everybody. Since 1970, being within half an hour's commute of Georgetown or Boston Common or the Embarcadero has become increasingly scarce and increasingly valuable.

If not for fact (1)--local political control prohibiting substantial density upgrades--fact (2) wouldn't matter much: we'd be changing Cambridge to look much more like the Upper West Side, and changing Berkeley to look much more like Cambridge. If not for fact (2)--SMSA-level congestion--fact (1) wouldn't matter much: we'd be building more greenfield neighborhoods within half an hour of the most interesting places, and the fact that established inner-belt suburbs restrict increased density wouldn't boost their housing values much or cause anybody much concern.

It is the interaction of the two, I think, that is key. IMHO zoning changed first, and then the consequences were triggered when congestion arrived as the freeways filled up.

Needless to say, none of this means that I am anything other than a huge and adoring fan of Ed Glaeser. In fact, is there a lobby pushing him for the Clark Medal?

And let's not forget that Red Ken Livingstone stole his congestion tax ideas from Milton Friedman...