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Is There a Supply Side to Urban Revival?

Working paper #453
Joseph Gyourko and Albert Saiz

There are economically large differences in construction costs across U.S. housing markets. This has important implications for urban revitalization because it is not low house prices per se that curb investment and redevelopment, but prices that are low relative to construction costs. Cost differences across markets are not due to an upwardly sloping supply for physical structure, as we estimate it to be highly elastic. Factors that explain differences in building costs include the extent of unionization within the construction sector, local wages, density, and public spending on regulatory enforcement. Costs are also systematically higher in the Northeast and West census regions. While real costs have declined by 11 percent on average over the past 15 years, their variance across markets has increased. Unionization in the construction sector and local wage growth are the most important predictors of recent cost inflation. In areas with large fractions of homes with prices close to replacement value, the evolution of construction costs in particular and supply side conditions more generally could be critical to their future viability as urbanized places.

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