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Urban decline and housing reinvestment: the role of construction costs and the supply side

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  • Joseph Gyourko
  • Albert Saiz

Abstract

Negative demand shocks have afflicted many American cities in the 20th century and are the main explanation for their decaying housing markets. But what is the role of housing supply? Rational entrepreneurs should not invest in new buildings and renovation when home values are below replacement cost. Households with an investment motive should behave similarly. Empirically, the authors find that construction costs are not very sensitive to building activity but do vary with local income, unionization rates in the construction sector, the level of local regulation, and region. They also document that the variance in building costs generates substantial variance in renovation expenditures across cities. Owner-occupied homes with market values below replacement costs spend about 50 percent less on renovation than similar homes with market values above construction costs. The authors also report on the distribution of the ratio of house value-to-construction cost across markets. The distribution is relatively flat in a number of declining cities, especially older manufacturing areas. In these places, a relatively modest 10 percent decline in replacement costs would find between 7-15 percent of the local housing stock moving from being valued below cost to above cost. Even though modest declines in construction costs are unlikely to change basic urban trends, the authors' results suggest they can be an important factor in determining whether various neighborhoods in declining cities will experience any significant reinvestment. In this respect, declining cities truly cannot afford to be expensive cities in terms of replacement costs: urban scholars and policy makers should begin to pay more attention to the cost side of cities.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 03-9.

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Date of creation: 2003
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Handle: RePEc:fip:fedpwp:03-9

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Keywords: Urban economics ; Construction industry ; Supply-side economics;

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References

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  1. Edward L. Glaeser & Jed Kolko & Albert Saiz, 2000. "Consumer City," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1901, Harvard - Institute of Economic Research.
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  7. Edward L. Glaeser & Joseph Gyourko, 2001. "Urban Decline and Durable Housing," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1931, Harvard - Institute of Economic Research.
  8. Stuart S. Rosenthal, 1999. "Residential Buildings And The Cost Of Construction: New Evidence On The Efficiency Of The Housing Market," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 81(2), pages 288-302, May.
  9. Freeman, Richard B, 1984. "Longitudinal Analyses of the Effects of Trade Unions," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 2(1), pages 1-26, January.
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  11. Goodman, John Jr. & Ittner, John B., 1992. "The accuracy of home owners' estimates of house value," Journal of Housing Economics, Elsevier, Elsevier, vol. 2(4), pages 339-357, December.
  12. Mendelsohn, Robert, 1977. "Empirical evidence on home improvements," Journal of Urban Economics, Elsevier, vol. 4(4), pages 459-468, October.
  13. Richard B. Freeman & James L. Medoff, 1983. "Trade Unions and Productivity: Some New Evidence on an Old Issue," NBER Working Papers 1249, National Bureau of Economic Research, Inc.
  14. Joseph Gyourko & Joseph Tracy, 2006. "Using Home Maintenance and Repairs to Smooth Variable Earnings," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 88(4), pages 736-747, November.
  15. Edward L. Glaeser & Joseph Gyourko, 2003. "The impact of building restrictions on housing affordability," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Jun, pages 21-39.
  16. Bogdon, Amy S., 1996. "Homeowner Renovation and Repair: The Decision to Hire Someone Else to Do the Project," Journal of Housing Economics, Elsevier, Elsevier, vol. 5(4), pages 323-350, December.
  17. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1257-78, December.
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Citations

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Cited by:
  1. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2005. "Bi-Directional Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Urban/Regional, EconWPA 0509012, EconWPA.
  2. Bento, Antonio M. & Franco, Sofia F. & Kaffine, Daniel, 2011. "Welfare Effects of Anti-Sprawl Policies in the Presence of Urban Decline," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 40(3), December.
  3. Kazi Saiful ISLAM, 2009. "Challenges Of Urban Planning At The Face Of Counter-Urbanization," Theoretical and Empirical Researches in Urban Management, Research Centre in Public Administration and Public Services, Bucharest, Romania, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 4(2(11)), pages 152-165, May.

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