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Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated With Many Demand Factors

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  • Davidoff, Thomas

Abstract

Economists sometimes assume that strictly regulated housing markets near mountains and oceans are expensive because they are costly places to build, not because they are nice places with productive firms and workers. U.S. data show this convenient assumption to be false. Housing supply has grown more in supply-constrained markets than elsewhere over recent decades, indicating constraints are correlated with demand growth. Supply constraints are highly correlated with productivity proxies such as historical education levels, immigration, and national employment growth in locally prevalent industries. The correlation between constraints and productivity growth invalidates common uses of constraints as part of instrumental variables for home prices. The relationship between supply constraints and price volatility is much weaker after accounting for observable demand factors.

Suggested Citation

  • Davidoff, Thomas, 2016. "Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated With Many Demand Factors," Critical Finance Review, now publishers, vol. 5(2), pages 177-206, December.
  • Handle: RePEc:now:jnlcfr:104.00000037
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    File URL: http://dx.doi.org/10.1561/104.00000037
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    Citations

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    Cited by:

    1. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, Elsevier.
    2. 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.
    3. Will Larson & Jessica Shui & Stephen D. Oliner & Morris A. Davis, 2019. "The price of residential land for counties, ZIP codes, and census tracts in the United States," AEI Economics Working Papers 1005118, American Enterprise Institute.
    4. repec:eee:pubeco:v:158:y:2018:i:c:p:126-151 is not listed on IDEAS
    5. Greg Howard & Carl Liebersohn, 2018. "The Geography Channel of House Price Appreciation: Did the Decline in Manufacturing Partially Cause the Housing Boom?," 2018 Meeting Papers 925, Society for Economic Dynamics.
    6. Victor Couture & Jessie Handbury, 2017. "Urban Revival in America, 2000 to 2010," NBER Working Papers 24084, National Bureau of Economic Research, Inc.
    7. Kessel, Dany & Tyrefors, Björn & Vestman, Roine, 2018. "The Housing Wealth Effect: Quasi-Experimental Evidence," Working Paper Series 361, Sveriges Riksbank (Central Bank of Sweden).
    8. Knut Are Aastveit & Bruno Albuquerque & André Anundsen, 2019. "Changing supply elasticities and regional housing booms," Working Paper 2019/8, Norges Bank.
    9. Cheshire, Paul & Hilber, Christian A.L. & Koster, Hans R.A., 2018. "Empty homes, longer commutes: The unintended consequences of more restrictive local planning," Journal of Public Economics, Elsevier, vol. 158(C), pages 126-151.
    10. repec:eee:juecon:v:99:y:2017:i:c:p:120-135 is not listed on IDEAS

    More about this item

    Keywords

    Housing Demand; Financing Policy; Wage level and structure;

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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