Stephen Malpezzi

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.

The Role of Speculation in Real Estate Cycles

Our study investigates the role of speculation in real estate cycles. We find that even a simple model of lagged supply response to price changes and speculation is sufficient to generate real estate cycles. Second, the volatility of prices – the biggest purported downside of “speculation” – is strongly related to supply conditions. Even more interestingly, the effect of speculation itself depends on supply conditions. Markets with more responsive regulatory environments, or less natural constraint (from physical geography), will experience less volatility as well as less behavior characterized as speculation. Demand conditions in general, and speculation in particular, can contribute to a boom and bust cycle in housing and real estate markets – but the effects of speculation appear to be dominated by the effect of the price elasticity of supply. In fact, the largest effects of speculation are only observed when supply is inelastic. Thus effective policies will focus on improving the efficiency of the supply of developable land, and real estate generally, including the development of an appropriate regulatory framework for real estate.

New Place‐to‐Place Housing Price Indexes for U.S. Metropolitan Areas, and Their Determinants

Housing prices vary widely from market to market in the United States. The purpose of this study is to (1) construct new place-to-place indexes of the price of housing, using the 1990 Census, and (2) analyze the determinants of housing prices, with a particular focus on the supply side determinants-regulatory and natural constraint-as well as the usual demand determinants. Copyright American Real Estate and Urban Economics Association.

Does the low-income housing tax credit increase the supply of housing?

Abstract The low-income housing tax credit (LIHTC) was originated in conjunction with the Tax Reform Act of 1986 (TRA 86) to provide incentives for private sector production of low-income housing. In this note we examine whether these units have added to the existing stock or merely substituted for unsubsidized units that otherwise would have been built. We explicitly control for effects of the number of other supply-side (e.g., public housing, Section 8 New Construction, Section 236 housing) and demand-side (vouchers and Section 8 Certificates) subsidies. From estimations of a simple cross-state model of the determinants of the stock of housing per 1000 population, we find no significant relationship between the number of LIHTC units (and other subsidized units) built in a given state and the size of the current housing stock, suggesting a high rate of substitution. However, our test is not sufficiently powerful to reject some alternative null hypotheses that suggest a lower rate of substitution, and we make some suggestions for future research.

Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex ante appraised value. We then estimate proportional hazard models of mortgage default and find that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are significantly related to default risk. Using valuations subsequent to loan default, we are also able to evaluate how well house price indices perform in terms of estimating current loan-to-value and offer some additional evidence on the controversy over the role of net equity versus trigger events as determinants of mortgage default. We also show that defaults are related to ex ante measures of housing market conditions, with additional implications for underwriting policies and the current industry trend away from traditional appraisal and toward automated valuation.

What Have African Housing Policies Wrought

This paper is a review of contemporary African housing markets, particularly the consequences of current housing policies. Overall, we conclude that the resource allocation which results from the current housing policies are quite contrary to their intended objectives. Many of the policies are suspect, both in terms of underlying economic rational and realistic economic achievement. In many respects, these policies have discouraged housing investment, and have been both inequitable and distortional. In rethinking these policies, our prescription is that since the private sector has efficiently provided the majority of the housing in the past, African governments must disengage themselves from direct production of housing. They must deregulate the housing markets and provide the right incentives, so as to realign the risks and rewards of investment in housing and permit private production to flourish.

Welfare Analysis of Rent Control with Side Payments: A Natural Experiment in Cairo, Egypt

Abstract Anecdotal evidence suggests that bribery is a common means of obtaining rent controlled apartments. Increased tenant maintenance is a less often noted, but potentially important, phenomenon in controlled markets. Previous empirical studies of the effects of rent control have neglected these side payments, presumably for lack of data. This paper presents evidence on their size and incidence for the controlled market of Cairo, Egypt, as well as estimates of effects such side payments have on welfare gains and losses from controls.

Urban regulation, the “new economy,” and housing prices

Abstract This article explores possible relationships between certain aspects of the so‐called “new economy,” in particular the economic structure of a metropolitan area (especially its technological orientation), and some aspects of the housing market (namely land use and development regulation, and housing prices). Regions with strong educational systems are more likely to have a high‐tech economy. Amenities, climate, and the urban regulatory regime seem to have little systematic effect on measures of the technological orientation of a region. Housing prices are strongly affected by regulation, as well as by several demand‐side determinants, notably demographic variables. The measure of technological orientation used in the article explained little of the variation in 1990 house prices, but was a substantial driver of 2000 house prices.

Can New York and Los Angeles learn from Kumasi and Bangalore? Costs and benefits of rent controls in developing countries

Abstract This article presents comparative static estimates of the costs and benefits of rent controls for four developing‐country cities: Cairo, Egypt; Kumasi, Ghana; Bangalore, India; and Rio de Janeiro, Brazil. The results are compared with those from four U.S. cities: New York; Los Angeles; Santa Monica; and Washington, DC. Rent control regimes and their effects vary widely across cities and countries. Whatever the “average” cost or benefit of controls, all markets have large variances about the average, and the variation is rarely strongly related to income or other household characteristics in a way most people would find desirable. In the countries for which there was direct evidence, landlords were richer than tenants on average, but not remarkably so, and there was considerable overlap in the two income distributions. In Cairo, where there was direct evidence, key money made up much of the difference between controlled rents and market rents. In very strict regimes, substantial reductions in rent...

Institutional Investors Tilt Their Real Estate Holdings Toward Quality, Too

This article confirms and extends prior results regarding tilting of institutional investment in common stock toward quality. The evidence presented here suggests that, while both real estate investment trusts and institutional investors tilt their real estate holdings toward quality, the tilt is much more pronounced in the case of institutional investors. Controlling for quality, there is further evidence that institutional investors overweight locations where the share of local employment in business services, finance, insurance, and real estate, and transportation is relatively high (compared to national averages). This evidence is consistent with the hypothesis that significant sector tilting by institutional investors is induced by the constraints of the prudent man rule.