The Boom and Bust of U.S. Housing Prices from Various Geographic Perspectives

Article excerpt

This paper summarizes changes in housing prices during the recent U.S. boom and bust from various geographic perspectives. Nationally, the Standard & Poor's/Case-Shiller house price index more than doubled in nominal terms during the boom and has fallen by roughly a third subsequently. During the boom, housing prices tended to rise much faster in metropolitan areas in the East and West Coast regions than in the country's interior. After adjusting for inflation, 7 of 19 metropolitan areas have experienced real declines in housing prices from the start of the boom to the present. Although lower-priced houses showed a larger percentage increase during the boom, higher-priced houses fared relatively better over the boom and bust. Changes in land prices, which are not easily measured, appear to have driven housing prices to a greater extent than changes in the prices of housing structures. Internationally, seven countries experienced housing booms and busts; however, these countries tended to have larger booms and smaller absolute busts than the United States. (JEL R31)

Federal Reserve Bank of St. Louis Review, September/October 2012, 94(5), pp. 341-67.


Beginning in the late 1990s, U.S. housing prices rose substantially and subsequently fell sharply. (1) Because many jobs are related to the value of housing through spending by households and the public sector, especially local governments, the recent swings in housing prices and housing-related employment have had significant macroeconomic and microeconomic consequences. (2) Not surprisingly, interest in the movements of housing prices over time and across geographic areas has heightened.

This paper is primarily a descriptive review of the recent boom and bust in U.S. housing prices from various geographic perspectives. Our focus is on presenting facts rather than providing explanations for the housing price changes. Thus, we do not present models of house price determination. Nor do we examine the literature assessing the importance of fundamentals (e.g., wages and interest rates) for housing prices changes or the effect of other factors that contribute to bubbles. However, numerous references providing and examining explanations for the housing bubble, as well as housing price changes in its aftermath, are presented throughout the paper. (3) Admittedly, the cited references are only a subset of the existing literature.

We examine both national and metropolitan area changes in housing prices. Our review of metropolitan areas allows for comparisons across these areas and, more generally, across regions. In addition, we review changes in prices within and across metropolitan areas by housing tiers. For example, housing prices in a metropolitan area are grouped into three categories: low, middle, and high tiers. Then, within a metropolitan area, the behavior of prices across the three categories is compared and, across metropolitan areas, the behavior of prices for each category is compared. To complete our review, we compare the recent U.S. experience with those of numerous advanced foreign economies.

A portion of our review of national and metropolitan area housing prices examines the changes in land prices and structure prices separately over the boom and bust periods. As stressed by Davis and Heathcote (2007) and Davis and Palumbo (2008), the price of a house can be separated into its physical structure, which is reproducible, and a plot of land, which is non-reproducible. These components serve different functions. The physical structure is an essential input for housing services as well as for leisure, while land, especially its geographic location, plays a key role in access to employment, public goods, and amenities.

These different functions and their varying degrees of reproducibility suggest that physical structures and land are priced differently. As a result, it is not surprising that the prices of structures and land behave differently over time. …