Wednesday, August 6, 2008

Housing Bubble - LA vs. Phoenix

I recently read some criticisms about housing prices being caused by restricted supply. This person wanted to know why Phoenix had a housing boom without severe growth restrictions.

The boom in Phoenix was probably not caused by supply restrictions as much as the boom was in other cities. The primary causes of the boom in Phoenix were mass emigration from Southern California and massive capital flows from Southern California.

My graphs compare population growth rates to home prices, using census data and the Case-Shiller Index.

What you can see in the graph is the population growth in Phoenix is highly correlated to price increases. However, in Los Angeles, this is not so. There is a clear inverse relationship between population and home prices. Whereas the boom in Phoenix can be at least partially explained by increased demand, the same cannot be said for Los Angeles. In the year before prices hit their peak, the population in the Los Angeles metro was beginning to decline. What explains this paradox? A restriction on supply.

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