Edward Glaeser, a new type of urban economist, on real estate

There’s a new kind of urban/regional/real estate economist around these days. Coming from a geographic rather than financial orientation, this movement is changing the way we think about real estate markets. Perhaps the leader of this new school of thinking is Edward Glaeser from Harvard University. Lisa Gibbs of Money Magazine recently interviewed Prof. Glaeser, who offered a wide range of interesting and insightful comments.

Edward Glaeser

Despite the national decline in house prices in virtually all U.S. markets with the bursting of the speculative housing bubble, it’s interesting that Glaeser predicted the growth in the size of Sunbelt cities long before prices began to shift. His approach was to look at January’s winter temperatures and use them as a signal for key locations where housing demand would be increasing. (Of course, many of these markets have now fallen the fastest but that’s a different story!)

Glaeser, along with others, emphasizes the importance of supply constraints. It’s obvious that increasing demand will lead to higher prices – but what seems less appreciated is the importance of restricted supply. Demand from snowbirds and reductions in transport costs of goods and people during the last century enabled a huge migration to the West, Southwest and Southeast.

Where there were restrictions on the supply of new house construction, prices remained high (e.g., coastal areas in California beginning in the 1970s). Compare the coastal California experience to unconstrained areas in cities such as Atlanta, Dallas, Houston, Las Vegas or Phoenix, where vast subdivisions appeared and urban sprawl took over. In recent decades, many of these massive new developments were sold to subprime borrowers and are now on the verge of being vacated. There have long been ghost towns in the Old West as tourist traps; now there are ghost towns developing in many cities which expanded rapidly where land was readily available.

On the matter of house prices, Glaeser often confronts the myth of continually rising prices. In the Gibbs article, he notes that for every real dollar increase in house prices over five years (real price changes are those after the effects of inflation have been removed), prices fall by 32 cents over the following five-year period! An observation consistent with his result is that prior to the recent housing bubble from 1995 to 2006, real house prices were either flat or they grew at very low rates over the past 50 or more years. So much for housing as an appreciating asset.

On the issue of government policy, Glaeser notes, “it’s not the job of government to make housing more expensive.” He’s not just talking about local land-use restrictions which drive up prices by limiting supply (the ultimate insider vs. outsider game); he’s referring to the $8,000 tax credit, the mortgage-interest deduction, the deductibility of property taxes and other governmental policies that favor current rather than future homeowners. (Consider the current low interest-rate policy which is aimed, in part, at stimulating housing consumption.) Each of these policies has its own benefits and drawbacks but Glaeser especially objects to the regressive nature of the mortgage deduction. He argues that the benefits to home ownership are magnified by the policy since the higher the household income, the greater the subsidy.  He estimates that the policy provides ten times more benefits to a household earning $250,000 as it does to one earning $75,000. Of course, those earning less lose out even more and renters are excluded altogether.

Edward Glaeser is a new type of urban economist and a breath of fresh — if sometimes controversial – air, yet he continues to attract a fair bit of attention. We could do worse than to listen to his ideas and see what they mean for the real estate market of the future.

Related posts:

1. Urban Land Institute study: The age of suburbanization is over
2. Job growth key to housing recovery
3. Negative equity critical threat to health of real estate market

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Tags: economist, glaeser, harvard

This entry was posted on Tuesday, January 19th, 2010 at 6:00 am and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed.