A hunch I have had about this curiosity is that, since the building mostly happens in places with moderate prices, this is inflating private fixed investment. The space over San Francisco and Manhattan is filled with hundreds of thousands - millions - of extremely valuable little cubes hanging in the air. For a half million dollars' worth of steel, gypsum board, and concrete, a little million dollar condo is just waiting their for us to claim. There is a tremendous amount of location value sitting there like gold buried in the ground. And, frustratingly, it is only there because the density enabled by centuries of wise and prescient planning made it so.
Since we won't unlock that value, we instead build houses in Dallas and Atlanta, where a half million dollars' worth of lumber and gypsum board creates a home worth a little more than half a million dollars. This isn't to cast aspersions at those Open Access cities. There isn't location value there because they are doing things right, because they haven't created economic rents through limited access to capital investment. Right now, most of that location value in Manhattan and San Francisco is due to those rents. So, the true measure of value we would get from building in those cities would eventually come from pulling their market values back down to their intrinsic, "Open Access" values. That is probably still somewhat higher than Dallas and Atlanta, but not nearly as high as their current market values. The main benefits from building in the Closed Access cities would be through the decline in all of the costs related to those cities and the goods and services they produce.
But, back to my hunch. I think part of the reason that the boom looked especially bubbly was because we measure all that lumber and gypsum board in private fixed investment, but we don't measure intrinsic location value in private fixed investment. So, the suboptimal pattern of not building in valuable locations, ironically, makes it look like we are investing more.
A more complete analysis regarding the dense city cores would obviously consider multi-unit values, too, but I'm not sure if there is a measure of the market value of new multi-unit structures that I can use for the comparison. To give an idea of the scale, single unit structures usually account for 2% to 3% of GDP (although it has averaged around 1% since the crisis). Multi unit private fixed investment in structures used to climb above 1% of GDP during expansions, but hasn't reached 0.4% since the 1980s. Building in our prosperous cities of an additional 0.5% of GDP would release a large amount of location value. It would be like investing in a 401k when your employer has a matching program.
Also, here, we can see something that I hadn't fully appreciated before. Total building in the Closed Access cities has been strong (relative to the depression levels of the rest of the country). But, that has been almost entirely because of multi-unit building. This isn't because those cities have suddenly seen the light. It's just because the constraints created by our hindered mortgage market aren't a constraint for large corporate developers, so their building rates are still determined by the same bureaucratic obstacles they always are. Urban multi-unit building is still much lower than it needs to be, but it isn't particularly constrained by our self-imposed credit bust. Despite the high location value, single unit homebuilding in the Closed Access cities remains very low. I had thought they would be higher.
Maybe it's a small thing. There was certainly a healthy amount of building going on in the 2000s, in either case. But, another brick in the wall, as they say.
PS: I'm not sure I'm happy with the indexed graph above. Here is the same graph, shown as a % of GDP. Here, the difference between the blue line and the red line is a broad estimate of location value.
The complication here is that location value is mostly economic rents. So, the end result of either having the problem (little building in valuable locations) or solving the problem (extensive building in valuable locations) would be to have lower location value.