House prices boomed in the early 2000s, but not everywhere. Many places experienced only mild price increases.
Economists have two explanations for this diversity in the increase in house prices across locations. One is that demand increased everywhere, but prices increased more where supply could not easily expand. I call this the aggregate demand view. In the second explanation, demand increased more in densely settled areas where additional construction was difficult. As more people wanted to live in those locations, aggregate house prices rose. I call this the reallocation view.
This article appeared in the Second Quarter 2020 edition of Economic Insights. Download and read the full issue.