The Housing Market

1. The Housing Market Chapter 13 1

2. Efficient markets • Large number of buyers and sellers • Homogeneous goods • 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. 2

3. Thick supply and demand curves for housing $110,000 $100,000 $90,000 3

4. Housing market • Stock of housing • Quantity: • Count of homes/apartments of specific quality • Price • Average price of median home • Purchase price • Monthly rent 4

5. Housing market • Flow of housing services • Quantity: • Housing units • Price determined using : • Repeat sales price index • Hedonic regression techniques 5

6. 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 6

7. 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 7

8. 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. 8

9. Housing Supply Functions • Risky investment • Durable good • Never identical to another if only because of location • Impossible to move neighborhood amenities 9

10. Suppliers of housing • Sources: • New home builders and rental agencies • Current homeowners • Government agencies • Each reacts to different incentives (maximize profits or maximize utility) 10

11. 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. 11

12. 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 12

13. 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 13

14. 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 14

15. Filtering theory of residential succession 15

16. 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” 16

17. 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 17

18. 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. 18

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20. 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. 20

21. 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 21

22. 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 22

23. Local regulations • Regulations stipulating minimum lot sizes exclude low- and moderate-income households. • Topic continued in Ch. 15. 23

24. 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. 24

25. 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 25

26. 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 26

27. The Pruitt-Igoe housing project in St. Louis 27

28. What communal spacesended up looking like 28

29. The destruction of the Pruitt-Igoe housing complex in 1972 29

30. Rent Controls • Popular since the days of Hammurabi (1792 BC) • Currently exist throughout the world 30

31. 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 31

32. 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 32

33. First-generation rent controls 33

34. 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 34

35. Housing vouchers when housing is a normal good 35

36. 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. 36

37. Housing vouchers vs cash when housing is an inferior good 37