By Adam Ozimek
Robert Shiller had an op-ed recently in the New York Times pouring some cold water on housing investors, or any home buyers who were hoping to turn a profit. In reading Shiller’s piece you can get the impression that all rises in home prices are temporary, and that supply increases will bring any price rises back to earth eventually. For instance:
By 2000, many people appeared to have forgotten that when home prices rise sharply, builders are likely to increase the supply, which tends to bring prices back down. We had such a supply response in the 2000s, and with a vengeance. In the near future, at least, while a speculative investing culture may re-emerge among homeowners, it is likely to be tempered by the memory of crashing prices.
There’s plenty of wisdom in Shiller’s piece and as a general rule I think people have overly rose views about housing as an investment. But I think it’s important to emphasize that not all price increases are temporary, and that real and permanent differences in prices do emerge. While most housing data you see is on the MSA level, these kinds of permanent differences can really be seen clearly at the neighborhood and sub-MSA level. Different parts of a city can become permanently nicer than other parts, with better amenities, drops in crime, and general turnaround in neighborhood quality.
You can see these in some graphs on the Philadelphia housing market I help put together every quarter for my day job (the full report from Econsult is here). The map above shows Philadelphia divided into subregions, and the graph below that shows prices for single-family homes 2003 forward.
Click to enlarge
It’s important to note that these graphs are quality adjusted so they attempt to control for house size, building amenities like central air, and other house and lot characteristics. What you see is significant long-run divergence. While South Philadelphia has more than doubled in prices since 2003, the Southwest/West subregion has only increased by 30%. And while South Philly is only 2% below it’s peak value, including the housing bubble peak, Southwest/West is still down 30% from the 2007 high.
This isn’t a slam dunk for housing speculators or a call for people to take on risky home purchases based on the assumption of huge increases in value. And it is not, I repeat, not a forecast. But it is an important reminder that permanent, long-run differences is neighborhood amenities, land values, and thus house prices can occur. While land overall may not be scarce, land in particular neighborhoods is.