Filtering down/up is a decline/increase in real value of a quality-adjusted unit of housing.

The Filtering Model

1. Y = Real Income2. QL = Quality Measure3. V = Real Value4. Housing Market is assumed to be in

Equilibrium: housing prices are stable and follow an identifiable path.

Model Assumptions

Limits to Filtering-UpSupply price (quality adjusted) ≤ market value

Limits to Filtering-DownRevenue (quality adjusted) ≥ Prime costs (fixed +

user costs)

Limits to Filtering up or Down

Equilibrium Description

Number of housing units supplied = number demanded

Quality of housing supplied ≥ quality demanded (over time … <)

Demand for better quality housing will increase over time

Shifts From Equilibrium

Price distortions in housing occur because of excess demand for higher quality space and excess supply of deteriorating space

Switching and Transactions costs make it infeasible to repair, remodel, renovate or rebuild housing space as often as is necessary for “traditional” equilibrium to occur.

Low Income HousingRemoval of Housing Slums

Supply of Housing Slums

Does the Filtering Model Work?

Neighborhood Externalities

Profitability BiasSocial Costs

Sub-optimality of Housing Slums

When Is a Parcel or Property Subject to Filtering?

Fixtures are obsolete or expendedNeighborhood is in “transition” to highest

and best use –or “second best” use“Quality” standards are unclear, undefinedHolding period for investor is very long

(10 to 20 years)

Filtering SolutionsMarket: redeveloping space

Minimize land use and zoning restrictionsProblem: Externalities and refiltering

Public Policy: rehabilitating/renovating spaceTax CreditsAdditional tax deductionsProblem: what is low-income housing

Market Based RedevelopmentDeveloper’s objective Developer’s observed behavior

Develop and “hold” (manage)Develop, lease-up, sellDevelop, sell

Rent requirement: turning the pro-forma on its head

Risk and sensitivity analysis