The Housing Market

Chapter 13

Efficient markets

1. Large number of buyers and sellers2. Homogeneous goods3. Perfect information about quality

• Housing market has none of these, but it is still 90% efficient

• Different personalities, search strategies and negotiating abilities of agents cause a thick supply and demand curve with a bell-shaped distribution of prices at each quantity.

Thick supply and demand curves for housing

$110,000

$100,000

$90,000

Housing market

• Stock of housing– Quantity:

• Count of homes/apartments of specific quality

– Price• Average price of median home• Purchase price• Monthly rent

Housing market

• Flow of housing services– Quantity:

• Housing units

– Price determined using :• Repeat sales price index• Hedonic regression techniques

Repeat sales price index

• Index of average sales prices of homes sold more than once within a given timeframe.– Eliminates renovated houses– Eliminates houses only sold once

Repeat sales price index

• Benefits:– May be the only viable way to estimate house

price inflation for a community

• Problems:– Excluded properties mean loss of valuable

information– Does not account for neighborhood changes– “Lemon effect” may bias index downward

Amenities and Housing Values

• Three types of amenities– Natural amenities

• Green spaces, proximity to water, proximity to scenic landscapes

– Historic districts– Endogenous amenities

• Quality education, proximity to entertainment spots, nice restaurants,

• Disamenities (location near pollution, unaesthetic structures, noise source) decrease land values.

Housing Supply Functions

• Risky investment

• Durable good

• Never identical to another if only because of location

• Impossible to move neighborhood amenities

Suppliers of housing

• Sources:– New home builders and rental agencies– Current homeowners– Government agencies

• Each reacts to different incentives (maximize profits or maximize utility)

Housing Demand

• Sources:– In-migrants– New householders

• Life-cycle hypothesis– Aged 15-25 no longer want to live with parents– Middle-aged need house large enough for family.

Demand changes with marriage and divorce rates.– Elderly need easy-access home near caregivers,

hospitals.

Tenure Choice: Rent or own?

• Renters– Young householders– Elderly (sell homes to become financially

liquid)– Poor– Single parents– Those who don’t plan to stay long

Residential Succession

• How occupancy of one housing unit passes from one income or demographic group to another– Filtering model (a.k.a. Natural Evolution

Theory of Urban Expansion)– Externality theory

Filtering theory

• Housing is a normal good.• As incomes increase, people want to consumer

more units of housing services, so they move.• Over time, housing units filter down to

successively lower income groups as area incomes increase.

• Provision of affordable housing unnecessary—market provides it through filtering

Filtering theory of residential succession

Externality theory

• Fiscal and social environment of city centers, income levels of neighbors and racial composition explain housing turnover.

• Neighborhood experiences influx of lower income, racially diverse households.

• Original residents perceive lower neighborhood quality and want to move before their housing values decline.

• Eventually neighborhood will “tip” from high-income to low-income area.

• Construction of low-income housing beneficial method to prevent “white flight”

Segregation

• U.S. was more segregated in 2001 than in 1860, before the Civil War.

• Four hypotheses– Interracial income differences mixed with the filtering

hypothesis to separate races– Voluntary sorting– Racial steering– Housing and zoning regulations

• Dissimilarity index measures extend of racial segregation

Dissimilarity (segregation) index

• Piw is the number of whites living in the ith census tract of the city

• Pw is the total number of whites in the city• Pih is the number of the specific racial/ethnic

minority population h living in the ith census tract of the city.

• Ph is the total number of that specific population in the city

• n is the number of census tracts in the city.

1002

11

n

i h

ih

w

iw

P

P

P

PD

Table 13–1. Top 10 Most Segregated Cities, by Racial Group

Whites Blacks Asians Hispanics

City D City D City D City D

Lowell MA 99.984 Detroit MI 95.421 Honolulu, HI 93.403 McAllen, TX 95.85

Lawrence MA 99.984 Monroe LA 94.912 San Francisco, CA

80.56 Laredo, TX 94.97

Nashua NH 99.966 Milwaukee WI 93.605 San Jose, CA 71.692 Los Angeles, CA

93.9

Sharon PA 99.952 Flint MI 93.027 Los Angeles, CA 65.878 El Paso, TX 92.56

Boston MA 99.949 Pine Bluff AR 92.744 Vallejo, CA 63.447 San Antonio, TX

90.48

York PA 99.947 Chicago IL 92.06 Oakland, CA 56.615 Brownsville, TX 87.69

Barnstable MA 99.947 Memphis TN 91.66 Anaheim, CA 53.402 Tuscon, AZ 86.54

Johnstown PA 99.944 Miami FL 91.513 Seattle, WA 52.639 Anaheim, CA 86.24

Providence RI 99.943 Birmingham AL 91.449 New York, NY 47.642 Corpus Christi, TX

83.22

Springfield MA

99.933 Gary IN 91.418 San Diego, CA 41.735 Albuquerque, NM

82.46

Calculations performed using block-level data from all MSAs in the 2000 U.S. Census. The sample includes all census blocks in all MSAs. Racial categories are mutually exclusive. Asians include Pacific Islanders.Source: Echenique and Fryer (2005), used with permission from the authors.

Spatial Mismatch

• Structural unemployment – Inadequate information about jobs– High costs of commuting– Long-term unemployed in inner city not taking

suburban jobs

• Job access hypothesis (Kain 1968, 1971)– Inner city concentrations of minorities limit

access to suburban job opportunities and thus prolong structural unemployment.

Voluntary Sorting

• Assumes that people want to live with their ethnic group to preserve language and culture

• Especially true of new immigrants who do not speak the native language

Racial (Geographic Steering)

• Perceived preference hypothesis: Real estate agents show whites and minorities houses in different neighborhoods because they – Assume their clients want to live with others of the

same race-ethnicity– Want to maximize sales (and their own commissions) – Steer clients to specific neighborhoods

• HUD’s Fair Housing Audits 1989, 2000

Local regulations

• Regulations stipulating minimum lot sizes exclude low- and moderate-income households.

• Topic continued in Ch. 15.

Affordability

• Is it an income or housing problem?• Definition evolution

– 1940: focus on overcrowding, dilapidation, private bathrooms and kitchens

– 2000: focus is proportion of household income spent on housing

• Median price /median income ratio• Glaeser and Gyourko (2003) concluded home

prices close to physical cost of construction to keep up with housing codes.

Government and Housing

• Government has moral dictate to intervene in market, or

• Governmental policies cause lack of affordable housing

• Three possible solutions– Public housing– Rent controls– Housing vouchers

Public housing

• “Projects” were a fiasco• Supposed to be temporary• Government crowded out market• Concentrated a large number of low-income

people on an isolated site, • Residents had limited access to information

about jobs• Example: Pruitt Igoe: Cost $15 billion in 1956

($110 billion in $2006) demolished 16 years later

The Pruitt-Igoe housing project in St. Louis

What communal spacesended up looking like

The destruction of the Pruitt-Igoe housing complex in 1972

Rent Controls

• Popular since the days of Hammurabi (1792 BC)

• Currently exist throughout the world

Rent Controls

• First generation: hard rent controls– Analysis as standard price ceiling– Discourage investment– Arbitrary redistribution and black market– Rental stock deteriorates– Administrative nightmare– Rents declined in controlled area, but

increased in uncontrolled residential areas

Rent Controls

• Second generation: soft rent controls– Restrict annual increases in rents– Maintenance costs passed on to tenants– Do not necessarily decrease quantity or

quality of housing supplied– May decrease mobility if landlords can

increase rents for new tenants.• Mismatched housing

First-generation rent controls

Housing Vouchers

• Assumes that affordable housing is income problem, not housing problem

• Households decide where to rent as long as unit meets the standards set by HUD.– Eliminates inefficiencies of government

provision of housing– Eliminates bureaucracy of rent control

Housing vouchers when housing is a normal good

Why not just give cash?

• Recipients can use the cash to maximize their utility.

• Taxpayers are no worse off, recipients are better off.

• Cash rather than housing voucher would thus be a Pareto Improvement

• A Pareto improvement exists when someone can be made better off without harming another.

Housing vouchers vs cash when housing is an inferior good