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A Time-Series Model of Housing Investment in the U.S

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  • Sherwin Rosen
  • Robert H. Topel

Abstract

A decentralized market theory of investment based on rising supply price is formulated and explained. Asset prices embody all available information in a competitive market and serve as "sufficient statistics" for future market conditions. Construction is determined myopically by marginal cost pricing: rising supply price constrains aggregate investment. Market dynamics imply that anticipated pulses in demand and interest rates lead to "bubbles" in prices, rentals and construction, because it pays to "build ahead of demand" in the presence of rising supply price. This model, similar to q-theory, assumes that long and short run elasticities of supply are identical. Short-run supply is less elastic than long-run supply when internal adjustment costs are superimposed on rising supply price. Then the current construction decision is no longer myopic and current price (or current q) is no longer sufficient for investment. Instead, builders must anticipate the future path of asset prices for current construction decisions. This enriched model is estimated under the hypothesis of rational expectations. The short-run elasticity is found to be 1.0 inquarterly data. The long-run elasticity is 3.0. The long-run is achieved within one year, indicating substantial built-in flexibility in the industry to accomodate great volatility in housing construction. Elastic supply helps account for the large fluctuations in output and employment observed in this industry. The data also show that prices alone do not clear the market. Other nonprice dimensions, including expected time-to-sale and overall transactions volume play independent roles which remain to be explained.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1818.

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Date of creation: Jan 1986
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Publication status: published as Rosen, Sherwin and Robert H. Topel. "Housing Investment in the United States," from Journal of Political Economy, Vol. 96, No. 4, August 1988, pp. 71 8-740.
Handle: RePEc:nbr:nberwo:1818

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  1. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  2. Mussa, Michael L, 1977. "External and Internal Adjustment Costs and the Theory of Aggregate and Firm Investment," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 44(174), pages 163-78, May.
  3. Topel, Robert H & Ward, Michael P, 1992. "Job Mobility and the Careers of Young Men," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 439-79, May.
  4. Benhabib, Jess & Nishimura, Kazuo, 1979. "On the Uniqueness of Steady States in an Economy with Heterogeneous Capital Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 59-82, February.
  5. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 2(1), pages 7-46, May.
  7. Zellner, Arnold & Palm, Franz, 1974. "Time series analysis and simultaneous equation econometric models," Journal of Econometrics, Elsevier, Elsevier, vol. 2(1), pages 17-54, May.
  8. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(4), pages 370-79, October.
  9. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  10. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 9(3), pages 297-323.
  11. Judd, Kenneth L, 1985. "Short-run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(2), pages 298-319, April.
  12. Engle, Robert F & Foley, Duncan K, 1975. "An Asset Price Model of Aggregate Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 625-47, October.
  13. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 81-100 National Bureau of Economic Research, Inc.
  14. Robert J. Barro & Chaipat Sahasakul, 1983. "Measuring the Average Marginal Tax Rate from the Individual Income Tax," NBER Working Papers 1060, National Bureau of Economic Research, Inc.
  15. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Kearl, J R, 1979. "Inflation, Mortgages, and Housing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 1115-38, October.
  17. Harvey S. Rosen & Kenneth T. Rosen & Douglas Holtz-Eakin, 1983. "Housing Tenure, Uncertainty, and Taxation," NBER Working Papers 1168, National Bureau of Economic Research, Inc.
  18. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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