In Peter Coy’s San Francisco, Boston, and Other ‘Superstar Cities’ [BW] he discusses the paper Superstar Cities [pdf] written by Joseph Gyourko and Todd Sinai of Penn and Christopher Mayer of Columbia.

[Academia is getting hip: using ‘Superstar’ in the title was bound to attract attention to the work.]

The purpose of the paper (missing an abstract) is to explain why certain US cities have experienced rising housing prices that have outpaced the remainder of the country. The Businessweek post cites the old explanations for this phenomenon as better amenities and higher worker productivity. Real housing prices tripled over the past 60 years yet, these Superstar cities experienced much more significant appreciation.

They sum it up this way:

Living in a superstar city is like owning a scarce luxury good.

A superstar city is defined as having: a limited supply of places in which to live, and in the face of increasing demand exhibits rising prices. More importantly, a superstar city is unique enough that there is no close substitute city, thus keeping the supply inelastic. A superstar city is not necessarily everyone’s top choice of a place to live, but it is preferred by some people, and it cannot be easily replicated to satisfy their demand. The more people that prefer the city, the more expensive it will become relative to others.

The paper doesn’t really define what causes the demand but the phenomenon is occuring on the east and west coasts where land is scarce. The gap between the rich and not so rich could expand as population growth places additional pressure on the fixed supply of land ’cause they ain’t making that anymore.

Note: This paper seems to be related to another paper co-written by one of the authors Joseph Gyourko called Why is Manhattan So Expensive? Regulation and the Rise in House Prices [pdf] which specifically tied housing price increases in Manhattan (using some of my data) to regulation. In other words, in addition to scarcity of land, other restrictions such as zoning have kept prices high.


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3 Responses to “Superstar Cities: Inelastic Supply Of Land, No Substitutes”

  1. Anon says:

    Not sure whether you’ve [a] already covered this and I missed it or [b] it is too hard to quantify in any useful way, but here goes:

    I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns.

    That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and this article (http://money.cnn.com/2006/08/07/real_estate/vulture_buyers_invade_market/) reminded me of again.

    One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

    Just a thought…

  2. Jonathan J. Miller says:

    Thanks – thats a really insightful suggestion. I have often wondered about this too, from the standpoint of “how many listings are there to look at that are actually priced within the market.” However, I am not sure how this can be accomplished, short of estimating the value of every property. There must be a way.

    However, I never looked at the limitation as completely as you did. In a market with many listings, but few prices properly, that could serve to keep prices up since supply is not exerting its full influence on the market.

  3. Downtown Pearl says:

    I’ve always said that Manhattan is a different animal in the world of real estate. It’s an island, there is no sprawling as done in London, Paris, Los Angeles etc. One either has a Manhattan address or not. Every person of means in the world would like to have a piece of it, it’s the center of the arts, finance, new ideas, etc. In the past five years more or less people have been able to purchase real estate in Manhattan then sell it after a couple years and become millionaires simply by that act. That kind of profit seems to have passed and although people are still making a handful of cash selling it’s not at the astronomical rates as previously. Some owners selling now still have the former scenario in mind with their price. And sometimes but rarely as often as before they’re still doing it. But most sellers just aren’t realizing that era is pretty much gone. New developments for the most part are being delivered fully finished and at premium prices so where is the opportunity to make a trememdous amount of money on a flip like that? Now that it’s being said interest rates will go down in 2007 this could be more problematic for sellers because it could possibly drive buyers back to the closet until then.