Limits on Building Permits = Higher Home Prices

Article excerpt

In June, the term "housing bubble" was used 312 times in American magazines and newspapers. That's up sixfold from a year earlier.

If chatter alone pricked a price bubble, we'd hear a bang, or at least hissing.

But so far, no pop, no hiss. As of the second quarter of this year, home values in the United States were up 14.1 percent in the past year, reports David Berson, chief economist for Fannie Mae, a major buyer of home mortgages from financial firms.

His "best guess" is that home sales are "very close to peaking." In some hot housing markets, such as San Diego and Washington, homes are taking longer to sell. But prices aren't tumbling.

How come?

Blame today's high house prices, often staggering to first-time homebuyers, on the Federal Reserve's past "excessively easy" monetary policy, says veteran Wall Street economist Robert Parks. Low interest rates and the Bush administration's expansionary fiscal policy have created "an unprecedentedly big and dangerous bubble," warns Mr. Parks, who predicted the last two stock-market crashes. "All big bubbles burst. However, nobody can say just when."

Harvard University economist Edward Glaeser reserves judgment.

"It could happen," he says. "But I don't know."

His relative calm stems from research with two other economists indicating that the main reason house prices have flown aloft in the past 20 or 30 years, particularly on the two coasts, is the increasing difficulty in getting regulatory approval to build new homes.

That situation won't change anytime soon. Last week, the Census Bureau reported the July annual rate of housing starts as barely exceeding 2 million. That sounds like a lot, but the rate of growth in overall housing has fallen. In a sample of 120 metropolitan areas, the housing stock expanded 40 percent in the 1950s. In the 1990s, it rose only 14 percent. Further, housing growth in that decade was just about 7 percent in San Francisco, New York, and Los Angeles, notes Mr. Glaeser.

Cities have changed from "urban growth machines to homeowners' cooperatives," he notes. Developers probably are less able to "bribe" or otherwise get city officials to grant them zoning changes or permits for unpopular new housing. More affluent, more educated residents use their political clout to block such developments, which could damage their own house values or the beauty and convenience of their district.

In what Princeton University economist Paul Krugman has called the "flatland" (the Midwest), it is easier for builders to turn farms into housing than in the "zoned zone" (heavily zoned areas on the coasts), where it is generally hard to obtain land to build on. …