Would-be residents priced out of the housing market or cash-strapped renters spending thousands of dollars per month to live in small studio apartments are normally the victims of restricted growth, but as home prices in growing urban areas reach astronomical heights, homeowners are starting to feel the pinch of a tight housing market. This inelasticity is causing home sales to decline in areas with restricted housing growth, writes Ben Casselman in The New York Times:
Part of the problem, local real estate agents say, is that the furious pace of price growth has essentially gummed up the market, making homeowners reluctant to sell for fear of being unable to find a new home.
Rising interest rates are compounding the problem because would-be sellers do not want to give up their low interest rates, a phenomenon economists call the lock-in effect…
But [one home owning family in Denver] borrowed at about 3.5 percent three years ago. Today, they would pay closer to 5 percent. “Even if we just saw houses at the same price, we’d have to pay more” every month, he said.
As interest rates rise, it becomes more expensive to borrow to buy a new home, locking in current homeowners. Though interest rates play a large role, if supply were to increase to match demand, housing costs would be lower and taking out a mortgage more feasible.
These results are similar to what a report from CoreLogic found on housing in the Bay Area:
“Bay Area home sales have fallen year over year for the last three consecutive months, and this summer’s activity was the slowest for the June-through-August period in seven years,” said Andrew LePage, a CoreLogic analyst. “The nearly 7 percent annual decline in sales this summer was the largest since sales fell 12.4 percent in the summer of 2010. Much of the recent slowdown can be attributed to the lack of affordable inventory on the market. Unlike the frenzied market of the mid-2000s, many struggling to buy today don’t have the option to stretch financially with the sort of subprime and other risky financing that fueled a lot of homebuying late in the last cycle.”
Declining home sales due to sky-high prices are a reminder that the laws of supply and demand, like gravity, are still in effect. But the market is not to blame–permitting delays, neighborhood reviews, development fees, and outright bans on development are short-circuiting urban housing markets and liberalizing these regulations would make both living and owning a home in these areas feasible.