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The Economic Implications of Housing Supply

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  • Edward Glaeser
  • Joseph Gyourko

Abstract

In this essay, we review the basic economics of housing supply and the functioning of US housing markets to better understand the distribution of home prices, household wealth, and the spatial distribution of people across markets. We employ a cost-based approach to gauge whether a housing market is delivering appropriately priced units. Specifically, we investigate whether market prices (roughly) equal the costs of producing the housing unit. If so, the market is well-functioning in the sense that it efficiently delivers housing units at their production cost. The gap between price and production cost can be understood as a regulatory tax. The available evidence suggests, but does not definitively prove, that the implicit tax on development created by housing regulations is higher in many areas than any reasonable negative externalities associated with new construction. We discuss two main effects of developments in housing prices: on patterns of household wealth and on the incentives for relocation to high-wage, high-productivity areas. Finally, we turn to policy implications.

Suggested Citation

  • Edward Glaeser & Joseph Gyourko, 2018. "The Economic Implications of Housing Supply," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 3-30, Winter.
  • Handle: RePEc:aea:jecper:v:32:y:2018:i:1:p:3-30
    Note: DOI: 10.1257/jep.32.1.3
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    References listed on IDEAS

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    1. Cheshire, Paul & Sheppard, Stephen, 2002. "The welfare economics of land use planning," Journal of Urban Economics, Elsevier, vol. 52(2), pages 242-269, September.
    2. repec:aea:aecrev:v:108:y:2018:i:9:p:2714-57 is not listed on IDEAS
    3. Paul Beaudry & David A. Green & Ben M. Sand, 2018. "In Search of Labor Demand," American Economic Review, American Economic Association, vol. 108(9), pages 2714-2757, September.
    4. Glaeser, Edward L. & Kahn, Matthew E., 2010. "The greenness of cities: Carbon dioxide emissions and urban development," Journal of Urban Economics, Elsevier, vol. 67(3), pages 404-418, May.
    5. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    6. Enrico Moretti, 2013. "Real Wage Inequality," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 65-103, January.
    7. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
    8. Rebecca Diamond, 2016. "The Determinants and Welfare Implications of US Workers' Diverging Location Choices by Skill: 1980-2000," American Economic Review, American Economic Association, vol. 106(3), pages 479-524, March.
    9. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 763-789.
    10. Glaeser, Edward L. & Ward, Bryce A., 2009. "The causes and consequences of land use regulation: Evidence from Greater Boston," Journal of Urban Economics, Elsevier, vol. 65(3), pages 265-278, May.
    11. Glaeser, Edward L. & Gyourko, Joseph & Saiz, Albert, 2008. "Housing supply and housing bubbles," Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September.
    12. Edward L. Glaeser & Joseph Gyourko, 2005. "Urban Decline and Durable Housing," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 345-375, April.
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    17. Joseph Gyourko & Albert Saiz & Anita Summers, 2008. "A New Measure of the Local Regulatory Environment for Housing Markets: The Wharton Residential Land Use Regulatory Index," Urban Studies, Urban Studies Journal Limited, vol. 45(3), pages 693-729, March.
    18. Matthew A. Turner & Andrew Haughwout & Wilbert van der Klaauw, 2014. "Land Use Regulation and Welfare," Econometrica, Econometric Society, vol. 82(4), pages 1341-1403, July.
    19. Glaeser, Edward L & Gyourko, Joseph & Saks, Raven, 2005. "Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 331-369, October.
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    Citations

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    Cited by:

    1. Anthony Yezer & William Larson & Weihua Zhao, 2018. "An Examination of the Link between Urban Planning Policies and the High Cost of Housing and Labor," Working Papers 2018-6, The George Washington University, Institute for International Economic Policy.
    2. repec:eee:ecanpo:v:60:y:2018:i:c:p:141-149 is not listed on IDEAS
    3. Ross Kendall & Peter Tulip, 2018. "The Effect of Zoning on Housing Prices," RBA Research Discussion Papers rdp2018-03, Reserve Bank of Australia.
    4. Kirdan Lees, 2018. "Quantifying the costs of land use regulation: Evidence from New Zealand," Working Papers in Economics 18/01, University of Canterbury, Department of Economics and Finance.
    5. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:151-255 is not listed on IDEAS
    6. Benjamin Austin & Edward Glaeser & Lawrence Summers, 2018. "Jobs for the Heartland: Place-Based Policies in 21st-Century America," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(1 (Spring), pages 151-255.
    7. Bettina H. Aten, 2018. "Valuing Owner-Occupied Housing: an empirical exercise using the American Community Survey (ACS) Housing files," BEA Working Papers 0149, Bureau of Economic Analysis.
    8. Yamagishi, Atsushi, 2019. "Minimum Wages and Housing Rents: Theory and Evidence from Two Countries," MPRA Paper 94238, University Library of Munich, Germany.
    9. Maria Chiara Cavalleri & Boris Cournède & Volker Ziemann, 2019. "Housing markets and macroeconomic risks," OECD Economics Department Working Papers 1555, OECD Publishing.
    10. repec:eee:regeco:v:74:y:2019:i:c:p:118-130 is not listed on IDEAS
    11. Simon Büchler, Maximilian v. Ehrlich, Olivier Schöni, 2019. "The Amplifying Effect of Capitalization Rates on Housing Supply," Diskussionsschriften credresearchpaper24, Universitaet Bern, Departement Volkswirtschaft - CRED.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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