The existing literature on price changes in the housing market between 2002 and 2010 has largely focused on temporary sources of demand—loosening and then tightening of credit markets or trend-following speculative activity. Using a new variable that quantifies the effect of inelastic supply on local prices, I estimate the relative scale of both supply- and demand-related factors on home prices.

The most important factors in changing home prices from 2002 to 2006 and from 2006 to 2010 were related to differences between metropolitan areas: (a) differences in regional demand for housing from factors like population growth, and (b) differences in housing supply elasticity. Much of the metropolitan area demand shifts were related to housing supply, because a lack of supply in some metropolitan areas caused families to migrate, increasing demand enough in other metropolitan areas to change home-price trends.

There was a credit boom and bust, but, from 2002 to 2006, the credit boom was associated with rising prices more in locations where price changes associated with supply constraints were moderate. Tightened lending standards after 2007 created pro-cyclical collapsing home prices in moderately priced regions while not addressing the supply constraints that were responsible for the most excessive price increases.