Oct. 30, 2006 - Manhattan as “fundamentally” different / supply, demand and superstars
limits on building increase volatility?
Jonathan Miller on Matrix today links to a Business Week article that suggests that ‘the answer’ may still be on the supply side, because cities that place limitations on supply (through zoning, principally) have both greater upside swings and greater downside swings. BW suggests that these markets (New York among them) will swing up from the current ‘bust’ more quickly than other cities.
How do you know if your own local market is the kind that will snap back or the kind that will languish indefinitely? One key factor is the ease or difficulty of building new homes. Places where new home construction is a long and expensive process, such as Boston and San Francisco, tend to experience big price movements, both up and down. "Restricted supply leads to more volatility in prices," says Edward L. Glaeser, a Harvard University economist who has studied big-city housing markets.
Glaeser isn't ready to predict where prices are headed market by market, but the cities with tight housing do usually boom again after a bust. In places such as Atlanta and Houston, by contrast, price cycles are usually mild, because the supply of housing is flexible. Traditionally, flexible markets have gone through booms and busts only when there was a wrenching change in demand, such as during the oil-patch roller-coaster of the 1980s.
Houston vs. Manhattan – my cost-to-build hypothesis supported
My hypothesis last week specifically mentioned Houston as a market in which the cost of building a new house would more directly limit the cost of resale homes, in contrast to Manhattan, so I take this as support for my supposition.
In fact, BW then goes on to support my demand-side supposition, talking about “superstar cities” that have unusual demand for housing:
With apologies to the mainstream, the truth is that supply considerations can cause markets to diverge from what seem to be the fundamentals for a long time, perhaps permanently. One explanation for this is the "superstar cities" concept developed by economists Joseph E. Gyourko and Todd M. Sinai of the University of Pennsylvania's Wharton School and Christopher J. Mayer of Columbia Business School. They argue that certain cities -- Boston and San Francisco, say -- benefit from a winner-take-all phenomenon that separates them from also-rans. People all over the world want to own homes in Boston and San Francisco, and the supply is limited. As worldwide wealth rises, there is a bidding war for homes there. No such luck for, say, St. Louis. In fact, according to the authors, the gap between prices in San Francisco and the national average doubled between 1970 and 2000
Part of this may be an analysis of which cities are ‘fashionable’ at a given time, with the ability to “create” demand by being “unique” tempered by (in some places – Miami, Las Vegas??) the ease of building more housing.
In an era of globalization, cities with international reputations can get an edge over blander neighbors if they're perceived as scarce commodities. For example, Nashville, as the capital of country music, has at least the potential to convert its fame into wealth, says Gleb L. Nechayev, an economist at Boston-based Torto Wheaton Research, a unit of CB Richard Ellis. Miami developers have parlayed the city's international fame into booming sales of condos to Latin Americans and Europeans. But while the uniqueness phenomenon may help growth in those cities, it won't necessarily keep prices up, because it's easy to build: Witness the current glut of Miami condos.
we are so special (really)
Of course, we in Manhattan view Manhattan as inherently and perpetually unique – so we are so special that we are immune from normal economics ;-)
THX to Jonathan for the link.
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