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The Diversity of Neighborhood Transitions

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  • Sharon I. O'Donnell

Abstract

Long-term observers of urban communities know that the housing quality distributions of communities and the changes of these distributions over time encompass not one but a variety of patterns. The equilibrium outcome derived from the housing market literature explains one pattern of change. Using Rust's stochastic equilibrium model of durable goods (Econometrica, 1985), we determine that the market can generate a set of patterns depending upon the degree of heterogeneity of homeowners, the underlying technology of the structures and the developer's demand for land. The paper presents a dynamic model of homeowner choice, given a market with new and existing structures of varying quality and a renewal process that describes the deterioration and replacement rates of these structures. There is a continuum of homeowners that differ by taste. Given the developer's price for new construction, the scrap price for sub-quality structures, and equilibrium bids of homeowner types in the market, heterogeneous homeowners sort along a holding distribution of homes. This paper describes the conditions for the existence and stability of stochastic equilibrium outcome. We find that long-run demand/bid function is the upper envelope of the bid functions of the individual types of homeowners in the market. The heterogeneous population (or diversity of preferences) leads to variations in the range of quality demanded for residential services and variations in optimal holding times for homes. Diversity also lead to utility gains for all homeowners.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 265.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:265

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Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
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Keywords: Housing markets; Stochastic dynamic programming;

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