Will the Real Price of Housing Drop Sharply in the 1990s
1992; Taylor & Francis; Volume: 77; Issue: 1 Linguagem: Inglês
ISSN
1532-4168
Autores Tópico(s)Housing Market and Economics
ResumoHome ownership has long been part of the American dream. From the mid-1960s to the late 1970s, the wealth of home owners rose substantially due to increases in the real price of housing--the price of housing adjusted for inflation. As a result, many people came to believe that buying a home was the safest and highest yielding investment that a household could make. But a drop in the real price of housing in the early 1980s challenged this view, and a further drop during the recent recession has raised concerns that home owners may face declining real home prices throughout the decade. Analysts differ about the outlook for real housing prices in the 1990s. Some observers argue that real housing prices may drop because the baby-boom generation is being followed into the housing market by a smaller baby-bust generation (Laing; Mankiw and Weil). The resulting weaker growth in housing demand may put downward pressure on the real price of housing. Other analysts argue, however, that such economic factors as real income growth and reduced home supply will offset these adverse demographic factors (DiPasquale and Wheaton; Downs). This article argues that economic factors in the housing market are likely to prevent a severe decline of real housing prices in the 1990s. The first section shows why some observers are concerned that the baby bust may depress future housing prices. The second section shows that demand-side economic factors also have important effects on real housing prices. In fact, some of the past increases in the real price of housing that have often been attributed to the baby boom may have been due to such factors. The third section discusses supply-side economic factors and explores the outlook for real housing prices in the 1990s. Recent concern about future housing prices has been fueled partly by sharp declines in housing prices in such cities as Boston and San Francisco.(1) But changes in metropolitan housing prices often reflect unique local factors in addition to national economic conditions. Fears of a prolonged fall in real housing prices at the national level are more realistically based on demographic factors, particularly the effect of the baby bust on future housing demand. Postwar experience shows that baby booms and busts have an important effect on the housing market. The real price of housing has fluctuated significantly over the postwar period. The real price of housing can be measured by the GNP deflator for residential investment divided by the GNP deflator for all goods and services (Chart 1). (Chart 1 omitted) Because this measure represents the price of housing relative to the general price level, the real price of housing falls if observed housing prices increase more slowly than the prices of other goods and services.(2) Although the real price of housing has fluctuated over the postwar period, Chart 1 shows no evidence of a persistent upward or downward trend. Changes in the real price of housing can be interpreted in a simple supply and demand model of the housing market (Figure 1). (Figure 1 omitted) The real price of housing is measured on the vertical scale, and the quantity of housing on the horizontal scale. The upward-sloping line S represents the supply curve of housing.(3) In the short run, changes in the price of housing induce only small changes in the quantity of housing offered on the market. The downward-sloping line D sub 1 represents the initial demand curve for housing. The demand curve is downward sloping because a rise in the real price of housing reduces the quantity of housing demanded, other factors held constant. A change in the birth rate influences the real price of housing by shifting the demand curve. After a period of years, a baby boom increases the quantity of housing demanded at any given real price of housing. As a result, the housing demand curve shifts to the right--for example, from D sub 1 to D sub 2 in Figure 1. …
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