Stephen K. Mayo

Theory and estimation in the economics of housing demand

The main purpose of this paper is to review recent theoretical and empirical developments in the economics of housing demand. In particular we ask, What is known concerning the permanent income elasticity of housing demand vis-a-vis the current or measured income elasticity? What is known concerning price elasticities ? What is the appropriate functional form for housing demand equations? What is the role of demographic variables? What is known concerning dynamic aspects of housing demand? What appear to be the major sources of bias in existing estimates of demand equations?

Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources

Many reviews of housing economics (and most of the papers on the subject) have noted that, relative to many other aspects of market behavior, housing supply is understudied. Surveys by John M. Quigley (1979), Edgar O. Olsen (1987) and Lawrence B. Smith (1988), to give but three examples, make this point. The market for research is in turn responding; for example, see the recent special issue of the Journal of Real Estate Finance and Economics devoted to housing supply (Stuart S. Rosenthal, 1999), and especially the review by Denise DiPasquale (1999). Despite these advances, the literature is best described as thin, especially relative to the acknowledged importance of the topic, and there is no firm consensus on the nature of housing supply. One unusual characteristic of housing supply is that the short-to-medium-run supply curve for housing embeds a fundamental asymmetry and can probably best be viewed as kinked. When housing demand falls, the market cannot easily adjust the supply of housing downward (because housing is so durable). On the other hand, absent constraints on land supply, the market should be able to absorb increases in demand via supply. Of course, it has been the case recently that the strong national market for new construction has led to material and labor shortages that have, in turn, driven up prices of materials and labor. That suggests that housing supply is not perfectly elastic in the face of increased demand, at least in the short run. Still, we would expect that in the absence of landsupply constraints, the speed of adjustment (in the DiPasquale and William C. Wheaton [1994] sense) of markets to upward shifts in demand is faster than it is to downward shifts. An assumption of imperfect elasticity is supported by, for example, James R. Kearl (1979), Robert Schwab (1983), Robert Topel and Sherwin Rosen (1988), James M. Poterba (1991), and Dixie M. Blackley (1999), who find that, at the national level, the price elasticity of supply is between 1.5 and 4. In a paper that ties econometric modeling to urban theory, Christopher J. Mayer and C. Tsuriel Somerville (2000) find housing supply on the national level to be even less elastic than their predecessors. On the other hand, Richard F. Muth (1960), James R. Follain (1979), and Malpezzi and Duncan Maclennan (1996) find much higher elasticities, with point estimates as high as 20. Malpezzi and Mayo (1997), show that there are significant differences in supply elasticities across countries, and that these differences seem to be correlated with the stringency of the regulatory framework in place for land and housing development. What is true across countries may also be true across cities, especially in a country like the United States, with significant local variation in land use and other regulatory practices. Recent papers such as John L. Goodman (1998) and earlier literature such as Raymond J. Struyk (1977) argue forcefully that supply conditions vary from place to place within the country. Despite the plausibility of metropolitan differences in supply responsiveness, to our knowledge, except for recent work by Mayer and Somerville (2000), little has been done to examine such variation directly. This paper’s focus is on estimating separate supply elasticities for individual metropolitan areas and explaining the source of differences in housing supply elasticities across U.S. Metropolitan Statistical Areas (MSAs). We posit that supply elasticity variances due to materials will not vary much by MSA (because materials are supplied nationally). In a similar vein, variances in the supply elasticity due to labor-market condi* Green: Department of Finance, School of Business, George Washington University, 2023 G Street N.W., Washington, DC 20052 (E-mail: drgreen@gwu.edu); Malpezzi: Center for Urban Land Economics Research, School of Business, University of Wisconsin, 975 University Avenue, Madison, WI 53706 (e-mail: smalpezzi@bus.wisc.edu); Mayo (deceased): Lincoln Institute of Land Policy.

Intraurban residential mobility: The role of transactions costs, market imperfections, and household disequilibrium

Abstract This paper presents a model of household residential search and mobility that focuses on microeconomic elements of household behavior and incorporates housing market features. The model is cast explicitly in terms of a rigorous model of housing demand, allowing the benefits from moving to be measured as the compensating income variation of the potential change in consumption. The empirical results indicate that large changes in economic variables, such as income and prices produce only small potential gains from moving and that a major factor in the moving decision is the magnitude of search and moving costs.

THE DEMAND FOR TENURE SECURITY IN DEVELOPING COUNTRIES

Abstract We use survey data for Manila, the Philippines, to estimate hedonic functions for formal and squatter housing values. We show that on average a rented squatter unit in Manila would rent for 15 percent more if it were a formal sector unit. An owned squatter unit would sell for 25 percent more if it were a formal sector unit. These percentages are interpreted as eviction risk discount for squatter dwellings. We conclude that assistance projects that provide secure tenure over a wide area will bestow comparatively greater benefits on lower income households, and to those in newer less established settlements, since the risks that they bear initially are greater.

User cost and housing tenure in developing countries

Abstract This paper reports on research conducted at the World Bank to increase understanding of developing country housing markets; in particular, of housing demand behavior. The objectives of the paper are (1) to briefly review recent evidence on housing demand parameters in developing countries, including new estimates for Colombia, Egypt, El Salvador, Ghana, India, Jamaica, Korea and the Philippines, and (2) to examine similarities and differences among cities in housing demand. The analysis emphasizes differences in housing demand by tenure (particularly for renters and owners, but also for squatters and non-squatters) and, paralleling the literature in developed countries, stresses the importance of accounting for the impact of income and relative prices on housing demand.

Sources of inefficiency in subsidized housing programs: A comparison of U.S. and German experience☆

Many developed countries include some mix of housing programs oriented toward either demand-side (consumer) or supply-side (producer) subsidies. Demand-side programs take the form of rent or housing allowances of various types, some of which are characterized by direct cash payments to program beneficiaries, while supply-side programs focus on either new construction or rehabilitation with a multitude of subsidy elements which cover both capital and operating costs. Debates over the efficacy of demand-side and supply-side subsidy programs are common in countries with a mix of housing subsidy mechanisms. Such debates have emphasized a number of differences in demand-side and supply-side programs. Major arguments in favor of demand-side subsidies are that they allegedly are less costly than supply-side subsidies, permit greater freedom of choice in housing and neighborhoods, are more equitable in that they permit more widespread participation among eligible populations, are more efficient in that they make better use of the existing stock of housing, and are more flexible for program administrators in that they can be easily turned on and off in response to changing needs and priorities. Arguments against such subsidies are that they allegedly result in little or no real housing improvement, fail to stimulate the supply of new housing, and drive up housing prices. In the U.S., many of these alleged advantages and disadvantages have been investigated through a series of social experiments such as the Experimental Housing Allowance Program (EHAP) and rigorous evaluations of major subsidized housing programs.’ More recently international comparisons of program outcomes have been permitted as a result of development