Housing Demand and Supply

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Housing Demand and Supply
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Today

• Return Exam
• Second Paper Discussion
• Housing Services and Supply

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Demand

• Related to
• Price
• Income
• Demographics
• HH Size
• Life Cycle

Hhsize 2
Everything else
Hhsize 6
High income
Low income
Housing, h
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Income Elasticities

• If our income increases by 500, do we move?
  Why?
• Economists feel that the appropriate measure to
  use is permanent income, related to wealth.
• Permanent income elasticities are probably
  somewhere between 0.5 and 1.0. Best guess may be
  0.5 to 0.7. Discuss.

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Price Elasticities

• Think back. How did we get price of housing?
• Is a 100,000 house half as expensive (per unit
  housing) as a 200,000 house?
• Presumably price of housing decreases as you move
  further out. Why?
• Most estimates of price elasticity of demand are
  less elastic than -1.0 (between 0 and -1.0)

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Price Elasticity and Expenditures

• Price elasticity is probably around -0.7 in
  absolute value.
• Suppose you own a house worth 100,000, and value
  is a straight multiple of rents (housing prices).
• As you move further out, price of housing falls
  by 20, and that price elasticity is -0.7. What
  happens to expenditures?
• E ( D Q)/ ( D P).

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Price Elasticity and Expenditures

• E ( D Q)/ ( D P).
• -0.7 ( D Q) / (-0.2) -- Why?
• 0.14 ( D Q)
• So, were buying 14 more housing, at 80 of the
  previous price.
• New house will cost
• V 100 (1.14) (0.8)
• V 91.2. ? Our expenditures ?.

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Moving Costs

• Changing housing consumption is costly. Why?
• You have to MOVE.
• Search costs
• Adventure in moving
• OSullivan gives one graph. Im going to give
  you a different one.

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Suppose
Adjustment w/o Moving costs

• You just got married.
• You want 2 kids.
• You expect your income to go up a little bit each
  year.
• Moving is a pain.
• What do you do?

Late y
Early y
Everything else
Housing, h
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BUT
Adjustment w/ Moving costs

• If you move it costs you and you KNOW it

Late y
Early y
Everything else

• INSTEAD, you buy a little more, early
• And a little less, late.

Housing, h
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What happens?

• You avoid the moving costs.
• Point here, is that households dont move every
  time their incomes change
• Or every time the housing price changes.
• We want a story that is realistic.

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Supply

• Think, for now, of housing as entirely rental
  stock.
• What do we know?
• It is durable. Dwellings can last for 100 years
  or more.
• Most of our housing supply comes from used
  stock, rather than new stock.
• Supply of services is pretty inelastic. Only 2
  to 3 of the housing on the market in any year is
  new.

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Housing Services and Housing Supply
of rent

• Assume owner has bought the house new.
• Rents it at 1 per/unit of services.
• Provides Q. Why? Excel - OS_CH14

Revenue
Maximum Profits
Cost
Q
Quantity of services, Q
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Housing Services and Housing Supply
of rent

• What happens as house gets older?
• Agt more expensive to maintain

Revenue
Maximum Profits
Cost

• We provide less of it.

Q
Q
Quantity of services, Q
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Marginal Analysis

• House ages, provide less

MC

MR

• Price (MR) rises, provide more

Quantity
Q
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Supply Curve May Be Kinked
Price

• New housing is built with about CRTS.
• Older housing once its built, its built.
• Glaeser and Gyourko (2005) tell this type of
  story.
• Yet, we do see substantial decrease in inner city
  supply.

Supply
new
old
Housing
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Table 5 Asymmetric Supply Estimates
Instrumental Variables
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Sources

• Goodman, Allen C., The Other Side of Eight
  Mile, Real Estate Economics 33 (2005) 539-569
• Goodman, Allen C., Central Cities and Housing
  Supply Growth and Decline in U.S. Cities,
  Journal of Housing Economics 14 (December 2005)
  315-335