Federal Reserve: New Supply Won't Lower Housing Prices in Expensive Markets

"Prices will march on as they have," even if regulations relax to allow more housing supply in the market, according to a recent study by the Federal Reserve.

August 7, 2018, 7:00 AM PDT

By James Brasuell @CasualBrasuell

The gentrifying street-scape of the South Park neighborhood of downtown Los Angeles, California

Bobak Ha'Eri / Wikimedia Commons

Erik Sherman shares a recent study from the Federal Reserve [pdf] that attempted to determine the amount of "elasticity" in the housing market—that is, how much new supply would be required to affect the price of housing. The study casts more than a little doubt on the notion that new supply will result in a commensurate lowering of prices (a position adopted by YIMBYs and policy makers in the Trump and Obama administrations alike)—in fact, the study argues that there is no evidence to support any determination about how much new supply it will take to lower the cost of housing.

"No one knows how much housing you'd have to add to have any significant impact on costs," explains Sherman of the ongoing question that launched the study. "So, the researchers built a simulation to estimate, directly from data, the elasticity of rent with respect to housing supply."

The key idea at the core of the findings is that elasticity isn't a simple phenomenon. "There are products where changing the price doesn't necessarily result in big shifts of demand. Look at the Apple iPhone X: $1,000 for the device and tens of millions purchased it."

The researchers also considered whether another approach could help lower prices, such as improving access to and the quality of public transportation in neighborhoods far from the city core. That solution likely only benefits those with larger incomes and more money to spend on housing. It creates a kind of "cascading gentrification engine," according to Sherman.

In the end, suggests Sherman, the only solution might be to reserve housing for lower-income people. "Hard to see that happening in the current political climate," however, concludes the article.

Friday, August 3, 2018 in Forbes

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