What has happened is that fewer homes are being built relative to the existing stock of houses. In a sample of 120 metropolitan areas, the housing stock climbed 40 percent in the 1950s; in the 1990s, housing stock rose only 14 percent. The 1990s average change for the 120 areas was double that in booming markets as San Francisco, New York, and Los Angeles where it is more difficult getting land approved for development. As evidence of this difficulty, the authors note that the physical cost of building a home as a percentage of the home price has diminished over time. In 1970 and earlier, structure costs represented about 90 percent of the value of a home in most areas. But since 1980, the cost of land and obtaining regulatory approval has shrunk the importance of building costs as a factor in house prices. For instance, along a swath of the east coast roughly approximated by Amtrak's Northeast Corridor, the non-structure component of house value exceeded 40 percent by 1990. By 2000, this pattern had spread to 27 metropolitan areas. In the San Francisco area, an outlier among metropolitan areas, structure costs probably represent no more than 30 percent of house value. The evidence, the authors write, points toward a man-made scarcity of housing in the sense that the housing supply has been constrained by government regulation as opposed to fundamental geographic limitations, especially in the last two or three decades. They see evidence that judges and local government officials have become increasingly sympathetic to community and environmental concerns with new housing developments. Zoning has become more restrictive. Permitting has declined by an estimated 37 percentage points between 1960 and today.
Manmade Scarcity Drives Up Housing Prices
From the National Bureau of Econmic Research, a look at how policies are the cause of high housing prices.