Superstar Cities

"In Superstar Cities (NBER Working Paper No. 12355), authors Joseph Gyourko, Christopher Mayer, and Todd Sinai suggest that the explosive growth in house prices in high-cost cities is fueled by three factors: the scarcity of housing units, the growing number of high income families in the United States, and the fact that high-income families have been willing to outbid lower-income families for scarce housing in preferred locations.

Superstar cities are those with an inelastic supply of housing (that is, cities where it is difficult to construct new housing because of geographical constraints or zoning) and an appeal to a broad clientele of potential residents. As households compete for the scarce locations, the ones with the highest willingness-to-pay - a function of a household's desire to live in a given city and how much money it has - bid up house prices. Using a simple method to roughly categorize cities as "superstars," the authors find that in the 1960-80 period only San Francisco and Los Angeles clearly qualified. Between 1970 and 2000, twenty more metropolitan areas, including New York and Boston, were added. Cities that have experienced explosive growth but remain outside the superstar category, like Las Vegas and Phoenix, are distinguished by their ability to build enough housing to moderate price increases."

From the Economist's ranking of the top 15 city economies:

• #1: Tokyo
• #2: New York
• #3: Los Angeles