Thus, we can better compare the self-reported value of a house with the cost of building a home from scratch. When combined with the Means data, the American Housing Survey allows us to examine housing prices in a wide range of cities as well as the gap between these prices and new construction costs.
These data suggest that America can be divided into three
broad areas. First, there are a number of places where housing
is priced far below the cost of new construction. These areas are primarily central cities in the Northeast and the Midwest, such as Detroit and Philadelphia. In these places, which were the subject of our previous work [[Glaeser and Gyourko 2001),
there is almost no new growth. In general, these places had
significant housing price appreciation over the 1990s, but
values are still below construction costs.
In the second category of housing, in large areas of the
country, costs are quite close to the cost of new construction.
These places generally have robust growth on the edges of
cities, where land is quite cheap. These areas represent the bulk of American housing, although they seem to be somewhat
underrepresented in the AHS.
Finally, there is a third category of cities and suburbs where
the price of homes is much higher than the cost of new
construction; Manhattan and Palo Alto are two examples.
Indeed, many of these places are in California, but the 1990s
saw an increase in such areas in the Northeast and South as
well. Although there are a number of such places with
extremely expensive homes, they do not represent the norm for America.
...
As a whole, our paper concludes that America does not
uniformly face a housing affordability crisis. In the majority of
places, land costs are low [[or at least reasonable) and housing
prices are close to [[or below) the costs of new construction. In
the places where housing is quite expensive, building
restrictions appear to have created these high prices.
http://app.ny.frb.org/research/epr/03v09n2/0306glae.pdf
