Houses in the Air

Over the past six months, attention and worry have shifted from America’s enormous trade deficit to its surging property markets and real-estate bubble. At least two of the reasons for high – and rising – home prices in the United States are well understood. What remains highly uncertain, however, is whether an obviously overheating market can be cooled without sending America, and its main trading partners around the world, into an economic tailspin.

The US housing boom is due, first, to low interest rates, which mean that large amounts of money can be borrowed for mortgages with moderate monthly payments. Low interest rates strengthen the ability to pay, and thus boost demand. And, with demand high and housing supply fixed – at least in the short run – prices go up.

Second, the 70-year period that began with the widespread diffusion of the automobile –during which one could get nearly anywhere in a typical metropolitan area in half an hour or less – is over. Before there was widespread automobile ownership, land prices depended on location, and proximity to the central city or to the local railroad station carried a premium.

Now, with serious congestion slowing traffic in major cities to a crawl, the land gradient in housing prices is steep once again. Perhaps this steepening of the location gradient could be delayed for a decade if we were willing to shift to denser residential patterns. We could, for example, tear down San Francisco’s row houses and replace them with buildings more like those of New York’s Upper West Side. But we aren’t willing to do that.