The Economics of Housing - What forces effect housing prices?

So the main question is “What forces effect housing prices?”  There’s multiple forces that effect housing prices.  Ultimately it’s supply and demand. But to break it down further there’s long term interest rates and lending policies, population shifts, wages, market speculation,  and government regulations. There’s more forces of course, but I don’t want to write about inflation.

Long term interest rates + lending policies- unless you’re a cash buyer, gold digger (of course I mean hot women with rich old men, not prospectors), or have a super rich Aunt Gertrude you can charm, chances are you’re going to have to finance your acquisition. The amount that it costs you to borrow money will directly affect how much you can afford. Assuming all other forces named above are staying constant, interest rates are inversely proportional to prices. As interest rates rise, it costs you more to borrow the same amount of money, and you can afford less house. And for those of us who have been alive for the last 6 years, we all know that when interest rates go down, we can afford to borrow more and housing prices rise.  And I had to tag on lending policies at the end here.  Things like the interest only mortgage has “helped” people “afford” more home.

Population Shifts - This one seems obvious to most people, of course when there is an influx of people to a  particular region, demand is going to increase, and supply takes longer to catch up.  The increase in demand will directly increase sales prices of homes.  One of my favorite topics that people tend to overlook is the effects of the baby boomers and the follow boom in the US population.  I would argue this is one of the more underdiscussed topics in real estate that has had a direct impact on housing prices since they started buying properties in the 70’s.  This is also one force that in my opinion will directly effect housing prices when the boomers start to “expire” starting in about 12 - 15 years (2018 - 2021 ish).

Wages - probably the least interesting of the topics, but I would feel stupid if I didn’t include it.  Similar to long term interest rates, wages in an area will directly effect housing prices in said area.  Take for example San Fransisco and Silicon Valley during the dot com boom and bust.  Nuff said.

Market speculation - I’m probably biased because I live here, but I think Boston and the Big Dig is a great example of the effects of market speculation influencing home prices.  One of the goals of the big dig was to take down the ugly raised highways, put them underground, and turn the above ground areas into parks to help beautify parts of the City.  Prices skyrocketed around the surrounding areas before any greenspaces were ever put into place.  A good way to note some possible speculation is with the Price Rent Ratio.  Basically when mortgage payments greatly exceed market rents for like properties, something’s up.  I would say that “something” is market speculation. 

Government regulations / interference- I originally wanted to include inventory, and discuss how inventory effects prices, but inventory IS supply, and it directly effects prices.  Since discussing the forces that effect supply is more fun, I wanted to break it down further to Government regulations.  Examples include:  Zoning and its direct effect on supply.  Rent control and its negative impact on properties and prices. Environmental impact laws restricting the supply of developable land.  And betterments like extending public transportation to somewhere it did not reach before.

That’s it for now.  Consider this more of an overview as I plan on delving further into most of these topics as we go on.  I only have so much time in the day.