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6/12/2016

TheOverinflatedFearofBeingPricedOutofHousingTheNewYorkTimes

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TheOverinflatedFearofBeingPriced
OutofHousing
EconomicView
ByROBERTJ.SHILLER

JUNE10,2016

Risinghomepricessetofffearsthatrealestatewillbecomeevenmoreexpensive,
makingitimpossibleevertobuyahomeinagivencity.
Itseasytounderstandhowsuchworriesspread,butthehistoricalrecord
suggeststhatthesefearsaregenerallyexaggerated.Citieswithsteepprice
increasestodaywillprobablyhavemuchsmallerupticksinthefuture.Andforthe
mostpart,differencesinpriceincreasesamongcitiesarewellexplainedbyshort
termvariationsinemploymentgrowth.
Considersomerecenttrends.IntheyearendedinMarch,citieslikeDenver,
SeattleandPortland,Ore.,hademploymentgrowthofmorethan3percent,
accordingtotheBureauofLaborStatistics,alongwithdoubledigithomeprice
increases,accordingtotheS.&P./CaseShillerindexes.Atthesametime,
employmentgrowthhasbeenrelativelytepidincitieslikeBoston,Clevelandand
NewYork,andsohavehomepriceincreases.
Thisisnotrocketscience.Whenbusinessesinacityhaveanunusually
successfulyearandhirealotmorepeople,newemployeesarrive,butinitially
therearentenoughhomesforthem.Homepricesriseimmediatelysothat
demandeffectivelyequalstheexistingsupply,inevitablycausingrippleeffects.

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6/12/2016

TheOverinflatedFearofBeingPricedOutofHousingTheNewYorkTimes

Someonewithanew,highpayingjobwilloutbidsomeoneelse,whowillhaveto
lowerhersightsandacceptalessattractivehouse.Peoplemuchfurtherdownthe
ladderwillenduplivingwiththeirparentsorwithroommates.
Onanationalscale,thissuggeststhatweakemploymentgrowthofthekind
showninMaysjobsreport,withonlya38,000increaseinnonfarmpayrolls,
couldeventuallyhurthomepricesacrossthecountry.Thatspossible.Buteven
withoutanationalpriceslowdownordecline,thereisreasontobelievethat
doubledigitincreaseswontcontinueforlonginindividualcities.Shortterm
variationsabound,butforthemostpart,thedifferencesinlongtermhomeprice
increasesinindividualcitiesareaboutplusorminusonepercentagepoint
annually.(ExceptionsincludeSanFranciscoandPortland,whosehomeprices
havegrownalmosttwopercentagepointsaboveaverageannuallysince1987.)
Citieswithbighomepriceincreasesrecentlyhaveissuedmorebuilding
permitspercapita.Thissupplyresponsehasthepotentialtoreverseatleastsome
oftheprices:Whenhousingsupplyincreases,ittendstobringhighrealestate
pricesdown,thoughthattakestime.
Thereisanotherwrinkle,however.Demandlatelyhastiltedtowardhomesin
centralcities,wherelandisscarce,ratherthaninmorespaciousdistantsuburbs.
Thiscreatesimbalances.Newhomesinthesuburbshaveoftenremainedunsold
forlongintervals.Constructionofapartmentbuildingshasincreasedincities
sincethefinancialcrisis,butnewarrivalswithgoodjobsoftenhaventwantedto
liveinapartments.Thismayexplain2016datashowingthatpermitsfornew
buildingswithfiveormoreunitshaveflagged.Despitetheseproblems,thesupply
responsetohigherhomepricesshouldmoderateorreversesomeofthebiggest
increases.
Yetmanypeopleassumethathomepriceswillriseeverupward.These
expectationsaremoremodestthanintheyearsleadinguptothe2008financial
crisis,buttheyaresubstantial.TheJanuary2016PulsenomicsU.S.Housing
ConfidenceSurveyshowedthatexpectationsforhomepriceincreasesoverthe
next10yearsaveraged3.7percentayearnationally,whichimpliesa44percent
totalincreaseby2026.Expectationswerealittlehigherforhomeownersthan
rentersandhigheryetforrecentbuyerswhichappearstoreflectawishful
thinkingbias.Theywerehighestforrecentbuyersinhighpriceincreasecities,
peakingatalmost6.5percentayear.

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TheOverinflatedFearofBeingPricedOutofHousingTheNewYorkTimes

Historically,however,investinginhomesjusthasntrewardedmost
homeownersthatmuch.AsIhavecalculated,homepricescorrectedfor
ConsumerPriceIndexinflationnationallywerenearlyflatforthecenturyending
in1990.Andwhennominalhomepricesaredeflatedbypercapitadisposable
personalincome,itturnsoutthatrealpricesofexistinghomesfell12percent
whilerealpricesofnewlybuilthomesfell30percentfrom1975to2015.
Astheirdisposableincomehasgrownrelativetohomeprices,individuals
haveboughtmorehousing.Thatspartlywhyaveragehouseholdsizedeclinedto
2.5peoplein2015from2.9in1975.Thepercentofhouseholdsconsistingofa
singlepersonroseto28percentin2015from20percentin1975.Thereareother
explanationsforthis,butoneiscertainlythathousinghasbeengettingcheaper,
relativetoincome,soweareconsumingmuchmoreofit.
Newhomesarelarger:Medianfloorspacehasrisento2,169squarefeetin
2010from1,525in1973,censusdatashows.Thislargeincreasegenerallyholds
withinmajormetropolitanareasandoutsidethem.Whilelivingspaceis
constrainedintheheartoflarge,highpricedcitieslikeNewYork,builders
elsewherehaveusuallybeenabletoaccommodatepeoplesdemandsforcheap
largehomesroughlywheretheywantthem.
Giventhesefacts,whydopeoplestillworrythathomepricesaregettingout
ofreach?Theanswercantbefoundinthehousingdata.Instead,thesefearsmay
reflectanxietiesaboutotherissueslikeincomeinequality,globalizationandthe
threatofjoblossesbecauseofrobotsandartificialintelligence.Inprosperous
cities,risingpricesmayconnoteeconomicexclusion.
Afterall,Americansocietyisincreasinglydividedaccordingtoeducational
attainmentandincome.Insomecircles,rarefiedhomepricesmaysetoffworries
aboutbeingunabletoliveinchoicelocationssharedwithsuccessfulpeople.
Homepricesmay,unfortunately,beviewedasameasurementofsuccessinlife
ratherthanmerelyoffloorspace,andfearofbeingpricedoutofhousingmay
wellberootedindeeperbroodingsaboutmaintainingapositioninthesocial
hierarchy.
ROBERTJ.SHILLERisSterlingProfessorofEconomicsatYale.
TheUpshotprovidesnews,analysisandgraphicsaboutpolitics,policyandeveryday
life.FollowusonFacebookandTwitter.Signupforournewsletter.

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6/12/2016

TheOverinflatedFearofBeingPricedOutofHousingTheNewYorkTimes

AversionofthisarticleappearsinprintonJune12,2016,onpageBU6oftheNewYorkeditionwith
theheadline:TheOverinflatedFearofBeingPricedOutofHousing.

2016TheNewYorkTimesCompany

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