Housing Supply Key to Price Inflation

Making room for more housing, whether by physical expansion or zoning changes that allow upward growth, is a key to modulating housing prices – and possibly to bolstering family incomes.

Making room for more housing, whether by physical expansion or zoning changes that allow upward growth, is a key to modulating housing prices – and possibly to bolstering family incomes.

Cities that make room for more housing have faced less housing-price inflation, according to an analysis by BuildZoom which drew the eye of the Wall Street Journal.

Issi Romem, an economist for BuildZoom, divides the urban landscape into “expansive cities” versus “expensive cities." 

He cited as an example the San-Francisco-San Jose area, which experienced a sharp population increase, but added only 30 percent more land for residential development between 1980 and 2010. Housing prices during that time period, he said, rose 188 percent. Romem contrasted that to Atlanta, which in the same time period expanded by 208 percent with housing prices increasing by only 14 percent.

The BuildZoom report shows Seattle expanding its residential footprint by 69 percent as housing prices rose by 119 percent. Portland was among the cities analyzed with the least physical expansion and rising housing prices nearing 80 percent.

WSJ reporter Laura Kusisto wrote, “Mr. Romem’s research reads on its face like an argument for suburban sprawl, which has come under fire both for its environmental consequences and tendency to lead to oversupply that can lead home prices to crash.”

Romem says the issue is less about sprawl than supply and demand. Ideally, he explains, cities would relax regulations to allow building up. However, adding density to existing neighborhoods can be unpopular, regardless of whether it involves the addition of tiny houses, building on open space or replacing single-family homes with multifamily apartments.

“If you don’t let the city grow,” Romem said, “you’re going to get prices going upward and see the middle class being pushed out.”

The Portland City Club’s recently released housing affordability study echoed many of Romem’s points as it recommended removing barriers to a wider array of housing types and a housing land bank to convert underutilized or foreclosed properties to housing.

While the BuildZoom research centers on major urban areas, the supply-and-demand problem also vexes suburban areas. Portland suburbs have seen price escalation in part because of voter rejection of annexations that would add more housing. Opponents have claimed sizable housing developments would overtax already congested roads and crowded schools.

The Portland metropolitan area’s land-use is constrained by an urban growth boundary, which is intended to restrict urban development and protect farmland from urban sprawl. The strategy has resulted in relatively small urbanized land expansion, forcing higher-density uses on and within the urban growth boundary. It also has led to sometimes awkward infill development and the exodus of families to what have become commuter communities outside the UGB such as Newberg, North Plains and even Keizer.

Housing patterns are being heavily influenced by different demographic preferences and economic realities. Baby Boomers are retiring and moving to smaller housing units nearer central cities. Young professionals, often burdened by high college student debt, are looking to rent, not buy. Some younger people are forsaking the whole “home is my castle” idea and settling for smaller, simpler housing that applies less pressure on their pocketbook and lifestyle choices.

Romem suggests businesses will be attracted to cities with available affordable housing and perhaps be turned off by cities without a supply of affordable housing. The economic consequences of inadequate housing supply are not just a concern for homebuilders and local boosters. President Obama’s White House advisers have pointed to a lagging housing supply as a major barrier to full economic recovery and higher incomes.

Artificial constraints on housing supply hinders mobility and increasing mobility is going to be an important part of the solution of increasing incomes and increasing incomes across generations,” says Jason Furman, chairman of the White House Council of Economic Advisers.