Wednesday, September 27, 2006

Do restictive laws constrain the market for new housing constuction?

[Fallout from the Housing Slump, Part II]

  After being gleeful over the early millennium skyrocketing of housing prices (the “last big gift of our nation to the 1946 baby boomers,” some have said), the media and economists now predict doom and gloom from the housing slump.  Many economists predict that the flatness (or even decline) in housing prices will depress housing construction, which will have a negative domino effect across the economy.

  But do housing prices affect construction all that much?  One economic critique is that that our restrictive land use and housing laws have artificially constrained the supply of new housing units, thus driving up prices.  See a 2005 study of the Harvard Institute of Economic Research to this effect, which I discussed at 37 Urban Lawyer 385.  With laws limiting supply, does this mean that small variations in housing prices don’t affect construction numbers, because construction is already at its legally constrained peak? 

  The numbers are interesting.  According to the National Association of Home Builders and the Commerce Department, housing starts did indeed shoot up significantly in recent years, to more than 2 million in 2005 –- a number that was more than double the total from the housing-price-stagnant era of 1991.  The monthly numbers for 2006, however, are falling rapidly.

   How does the 2005 peak compare to years past?  Interestingly, the 2 million total was exceeded way back in 1972 (just before the oil and stagflation crises of the next few years).  So, yes, housing prices do affect the quantity supplied, but the correlation seems to be less than crystal clear. 

http://lawprofessors.typepad.com/land_use/2006/09/do_restictive_l.html

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