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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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    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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