On Mon, 19 Aug 2002, Alypius Skinner wrote: > I have often seen the housing market so strong that even stocks of > physically depreciating housing (darn that second law of > thermodynamics!)would appreciate in market value, often quite rapidly. > Many times the cost of housing presumably increases faster than the > cost of the inputs (labor and materials). Why doesn't a natural cap > exist on housing appreciation by virtue of the "threat" that potential > buyers may simply build their own houses by paying for the labor and > materials directly?
If most of the value accrues from land use and zoning regulations that prevent tearing down and rebuilding, and if comparable land is unavailable, then such a cap could be quite high. There was an NBER piece a little while back estimating how much of land value was from the zoning/permitting process -- was significant amount, but can't recall the figures. Guess the cap would be that the difference in value between a house in disrepair and a potential replacement house can never be more than the construction costs PLUS the permits. If the permits are expensive, you'll see a lot of homes in relative disrepair. > On a related note, why does the local press--which does all sorts of > handwringing over the rising prices of gasoline, food, electricity, > automobiles and other consumables--rejoice when local housing prices > are inflating? In fact, the higher the rate of housing inflation, the > louder the local opinion shapers seem to cheer. Why don't they cheer > when the price of, say, transportation or food increases at a double > digit annual rate? Because most folks have far more of their wealth locked up in their home than in shares in oil or grocery companies. Can make an argument that homeowners are better off whether prices rise or fall (income and substitution effects: prices fall, you can afford a bigger house; prices rise, you can sell your house and buy more other stuff); but most folks tend not to think of things that way. Eric > > ~Alypius Skinner >
