The big idea: housing in desirable city neighborhoods in getting more expensive because the demand for urban living is growing. The solution? Build more great neighborhoods.
To an economist, prices are an important signal about value: rising prices for an object or class of objects signal increasing value relative to other objects. In our conventional supply and demand framework, rising prices are often symptomatic of a growing demand or a limited supply: that consumers now want more of some commodity or product than is currently available in the market.
Trends in housing prices point to some significant shifts in consumer demand, especially in the value that consumers attach to urban, as opposed to suburban, locations. The rising relative price of housing in cities is a strong indication of the growing demand for urbanity–and its unfortunate short supply.
Case in point: Portland, Oregon. Let’s take a quick glance back at housing prices in the Portland area over the past decade (courtesy of Zillow’s comprehensive archive of monthly housing price estimates). For simplicity, we’ll look at four Portland metro area sub-markets–the central city of Portland (home to a little more than a quarter of the region’s population), and the region’s three principal suburban counties–Clackamas and Washington Counties in Oregon, and Clark County, Washington. The following table shows single-family home prices for 2005, 2007 (the peak year for the region’s housing market), 2010 (the bottom of the bust) and the data for the latest quarter (3rd Quarter 2014). To simplify comparison between the city and suburbs, I’ve calculated the un-weighted average price for for the three suburban counties.
In 2005, in the heyday of the housing bubble, the city of Portland’s housing prices were $236,000, on average about $20,000 lower than the three suburban jurisdictions, ranging from $3,000 lower than Clark County, to $30,000 lower than Clackamas County. According to Zillow’s latest estimates the average Portland single family home is now worth about $309,000. Portland’s prices today are about $20,000 higher than the average of the three suburban counties, and its price level is equal to that of the Clackamas, the priciest suburban county.
Not only have houses in the City of Portland re-couped all the value lost to the collapse of the housing market, they are now worth on average about 6 percent more than they were at the peak of the housing bubble. Meanwhile, the average suburban home is still about 7 percent below its peak price.
The verdict of this shift in housing markets is unequivocal: housing in the city is now more valuable, and has appreciated faster than suburban housing. In less than a decade, the city has reversed geographic polarity of the regional housing market: the average city house sold at a nine percent discount to the average suburban house in 2005; today the average city house commands a seven percent premium.
There are doubtless many reasons for this shift. We know that young, well-educated workers are increasingly choosing to live in close-in urban neighborhoods. Over the past decade, the big increase in gasoline prices has made car-dependent suburban locations more expensive and less attractive than urban living. My 2008 CEOs for Cities report “Driven to the Brink,” reported some early evidence that housing prices fell most on the suburban fringe, and held up best in urban centers.
The falling price of suburban housing relative to city housing is the most persuasive evidence possible about consumer preferences. Citing the results of a recent opinion survey, some have claimed that Portland-area consumers allegedly prefer suburban locations to urban ones. But the fact that consumers are not willing to pay as much for suburban housing as they are for urban housing, and that while urban home prices are setting new highs, suburban prices are still well below their peaks, shows that the reverse is actually true: consumers value urban single family housing more than its suburban alternative.
The rising price of urban housing is a market signal that housing in the city has value to consumers–and that we should be making more of it. Prices are rising because the demand for city living is rising faster than we’ve expanded the supply of urban housing. The clear public policy implication of the market data is that city and regional governments should be looking seriously at ways to expand the supply of urban housing. And expanding supply in the city is especially important to addressing concerns about housing affordability: unless supply expands, we can reasonably expect the growing demand for urban living to push prices still higher, reducing affordability.
While this commentary focuses on the city of Portland, there are good reasons to believe that the nation is experiencing a significant and growing shortage of cities as well. As Americans rediscover–and recreate–the attractiveness of urban living, this shortage is likely to grow. Paying close attention to the signals provided by the housing market is key to understanding the nature of this challenge and implementing appropriate solutions.
Technical Notes: Data for this analysis were obtained from Zillow.com’s city and county ZHVI-Single Family Residential index. Values are annual averages of monthly data, rounded to the nearest $1,000. The suburban average presented here is the unweighted average of the price index values reported for the three suburban counties. Since these four areas are all part of a single, larger metropolitan economy that shares the same industrial and job base, its pretty straightforward to interpret the change in relative prices among sub-markets as indicative of the relative change in consumer preference for these areas. Also, because so little new single family housing has been constructed in the past several years, these numbers are not meaningfully skewed by the construction of a large number of new houses in any one jurisdiction.
