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Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy

Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy. Dr. Bryce Ward. Economics, Not Fashion. What does it mean to say housing is affordable?. Affordable if: Thus, we need to understand housing markets and labor markets. Framework for understanding housing markets.

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Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy

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  1. Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy Dr. Bryce Ward

  2. Economics, Not Fashion

  3. What does it mean to say housing is affordable? Affordable if: Thus, we need to understand housing markets and labor markets

  4. Framework for understanding housing markets Demand = desirability Supply = availability

  5. What makes a house desirable? Why is there demand? • Two parts: • Physical Characteristics: square feet, number of bed rooms, year built, flooring type, air conditioning, lot size • Location: in which city/region is it located, and which part of the city? • Across cities people care about: proximity to high wage jobs (productivity), pleasant climate, desirable cultural, recreational, and consumer amenities (quality of life), and other cost differences (cost of living) • Within regions, differences in desirability reflect differential proximity to work, good schools, parks, shopping, crime, etc.

  6. What determines availability or supply? Is there land that one can build on near desirable places? This depends on: • The amount of developable land (not underwater, not too steep, not otherwise protected) near desirable places How hard/expensive is it to put housing on that land? This depends on two factors: • Availability of building materials • Stringency of regulation

  7. Putting demand and supply together. What’s the price of housing in Portland?

  8. Metro area differences

  9. Differences in housing prices across place reflect • Differences in wages/productivity • Differences in quality of life • Differences in land availability • Differences in land use regulation

  10. Differences within Portland Source: Zillow Home Price Index for Portland Neighborhoods

  11. Rent and distance to city center in Portland Source: Wilson and Frew (2007)

  12. Affordability must include all costs related to location Affordability metric=

  13. Issues to watch (numerator) • Housing prices: Home values crash and starting to recover, declines in ownership put pressure on rents, fed commitment to low rates should help speed recovery • Commuting costs: Rising gas prices may lead to higher home prices in places with shorter commutes

  14. Income and the labor market • (1) Rising inequality (stagnant or declining income for most, but enormous gains for a few)

  15. Income and the labor market (2) Stagnant mobility (Kopczuk and Saez 2007)

  16. Why? • Skill-biased technological change • Globalization • Weaker labor market institutions • Polarization of the labor market

  17. Declining Housing Affordability • Over the long run, housing prices and cost have risen faster than income for a larger swath of the population. • In 1990, Portland’s median renter’s gross rent was less than 23% of household income. • In 2010, Portland’s median renter’s gross rent was nearly 29% of household income.

  18. How to address affordability? • Decrease numerator • Lower housing prices • Increase supply (availability) • Decrease demand(desirability) • Lower related costs (e.g., commute) • Increase denominator • Raise income (increase productivity – particularly of the traded sector) • If not addressed, over the long-run, people (particularly lower income people) will move elsewhere.

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