Saturday, February 27, 2010
Gov't Must Not Escape Blame In Whodunits
...The one agency of government that is widely blamed is the Federal Reserve system — which still keeps the heat away from elected politicians. Nor is the Fed completely blameless. It kept interest rates extremely low for years. That undoubtedly contributed to an increased demand for housing, since lower interest rates mean lower monthly mortgage payments.
But an increased demand for housing does not automatically mean higher housing prices. In places where supply is free to rise to meet demand, such as Manhattan in the 1950s or Las Vegas in the 1980s, increased demand simply led to more housing units being built, without an increase in real prices — that is, money prices adjusted for inflation.
What led to a boom in housing prices was increased demand in places where supply was artificially restricted. Coastal California was the largest of these places where severe legal restrictions on building houses led to skyrocketing housing prices.
Just between 2000 and 2005, for example, home prices more than doubled in Los Angeles and San Diego, in response to rising demand in places where supply was not allowed to rise to meet it.
At the height of the housing boom in 2005, the 10 areas with the biggest home-price increases over the previous five years were all in California. That year, the average home price in California was more than half a million dollars, even though the average size of the homes sold was just 1,600 square feet....
...Other enclaves, here and there, with severe housing restrictions also had rapidly rising housing prices to levels far above the national average....