Friday, October 30, 2009

Nothing Perplexing About San Francisco Real Estate Prices

A recent article on the rise in house prices in San Francisco in the San Francisco Chronicle elicited this closing comment. "Perplexing. What makes this city so impervious to the ecomonic meltdown of California in general?"

Well, as Homer Simpson would say, "d'oh." San Francisco may be the prime example of geographic areas in which there are "high barriers to entry" for real estate development, i. e., for various reasons increasing the housing stock by any meaningful amount is close to impossible. It may be environmentalists, it may be NIMBYs, it may be opponents of traffic congestion, it may be preservationists, or it may be building requirements that add tens of thousands of dollars to the basic cost of building a new home. But the effect of these forces is to make the cost of residential housing much higher than it is in an area not burdened by such influences, e.g., Texas. It should be noted that even during the dot com bust, Bay Area housing prices did not decline. so the effect of these artificial restrictions on housing supply is strong. It was only with the catastrophic economic downturn that we've seen housing prices in San Francisco and Los Angeles finally buckle. It would also seem that as the economy recovers, housing prices in high barrier to entry locales such as San Francisco, Los Angeles and Orange County should have a disproportionate price recovery. Certainly it'll be a long time before Adelanto, Palmdale and Murietta recover, but for the coastal areas of California, the recovery may be more vigorous than may be commonly expected.

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