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By Nicole Goodkind
Sales of single-family homes in the U.S. rose by 5.7% in September, the highest rate since April 2010.
Most would argue that these numbers are indicative of an improving economy -- an increase in housing sales leads to an increase in housing prices. Daniel Shoag, associate professor of Public Policy at Harvard's Kennedy School, would argue the opposite.
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High housing prices actually decrease income mobility and ultimately hurt the U.S. economy, according to a new study by Shoag and his colleague Peter Ganong.
"What higher housing prices have done," Shoag tells the Daily Ticker, "is they've taken half the country off of this income convergence track." Certain U.S. cities have "become prohibitively expensive for low-skilled workers and they've sort of become segregated places full of high-skilled workers. That's contributed to regional income inequality and played a part of the rising income inequality that we see."
Laborers are being priced out of cities like San Francisco and New York City and migrating to smaller cities like Las Vegas and Phoenix. This phenomenon slows economic growth, Shoag argues.
"Building restrictions can lower growth by shifting people away from the most productive parts of the country," he says. "These restrictions artificially raise housing prices and the cost of living. In response to this, people (particularly low skilled people) are choosing not to live in the places that offer them the highest wages. These restrictions have increased income inequality and can lower economic growth."
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Since 1980 the rate of income convergence has been stagnant. The average income of U.S. workers has remained flat for the past 30 years and the migration of low-skilled workers across states has also slowed significantly.
This hasn't always been the case. Between 1880 and 1980 low-skilled workers moved to wealthier states and the average incomes between states converged by an average of 1.8% per year.
So why has the cost of housing changed so drastically in the past 30 years?
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An increase in land regulation in high-wage states and cities discourage development that would lower housing prices, says Shoag.
"It's surprising that local regulations can have such a big macroeconomic impact...that they can affect this process of income migration and conversion, which are long-standing macroeconomic relationships," he notes.
Policies, however, can be reversed: Shoag has already been contacted by lawmakers in Washington in hopes of figuring out how to encourage new, affordable developments in high-wage places.
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