Was There A Home Price Bubble?

Regions with the greatest price appreciation during the “housing bubble” were the areas with the most home development. If the prices in the housing market were irrational, developers would have tried to make abnormally high profits. In addition, there would have been a rush to sell land to developers and share in some (all) of the abnormal profits.

Material plus labor costs increases would not account for most of the appreciation of new home prices. Substitutes exist for many house components and material suppliers could increase production.

However, land cost increases might have accounted for a large part of the appreciation. Landowners would have shared in the excess profits available to developers by raising the price of future home plots. Additionally, the marginal cost of land increases as development occurs. The land in an area that is the cheapest to build upon is used first. As development continues, the land remaining for development is the more costly, requires greater preparation and has more government regulatory approval uncertainty.

I have nor not seen anything about home builders making abnormal profits for their risks. I have also not seen anything about the developers’ land and plot preparation costs to show that there were abnormal profits to developers.

Unless developers were showing extraordinarily high rates of returns on their investments, I would go with efficient markets as the most likely and not a housing bubble. I would guess that demand for undeveloped land with high marginal development costs and risks was responsible for most of the price appreciation called a housing bubble.