Unifying empirical and theoretical models of housing supply
Housing supply plays an important role in the volatility of macroeconomic cycles and the speed with which house prices respond to changes in demand, yet it is understudied in the current literature. In this paper we present and estimate a new model of the supply of residential construction that is consistent with the theoretical treatment of land development and urban growth. This model shows that new housing construction is best described as a function of changes in house prices and costs rather than as a function of the levels of those variables. Previous research that uses the price levels specification has the drawback that a one-time increase in the number of households that raises the level of real house prices leads to a permanent jump in new construction and thus an infinite increase in the stock of housing. The empirical tests of the model support our new specification, which performs better than alternative models in out-of-sample forecasts. Our estimates suggest a fairly moderate response of supply to house price changes. A 10 percent rise in real house prices leads to an 0.8 percent increase in the housing stock, which is accompanied by a temporary 180 percent increase in the average number of quarterly starts, spread over four quarters.
|Date of creation:||1996|
|Date of revision:|
|Contact details of provider:|| Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210|
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Malpezzi, Stephen & Maclennan, Duncan, 2001. "The Long-Run Price Elasticity of Supply of New Residential Construction in the United States and the United Kingdom," Journal of Housing Economics, Elsevier, vol. 10(3), pages 278-306, September.
- Richard Arnott & Frank D. Lewis, 1977.
"The Transition of Land to Urban Use,"
267, Queen's University, Department of Economics.
- Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
- Karl E. Case & Robert J. Shiller, 1988.
"The Efficiency of the Market for Single-Family Homes,"
NBER Working Papers
2506, National Bureau of Economic Research, Inc.
- Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
- Topel, Robert H & Rosen, Sherwin, 1988. "Housing Investment in the United States," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 718-40, August.
- Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
- James R. Follain, Jr., 1979. "The Price Elasticity of the Long-Run Supply of New Housing Construction," Land Economics, University of Wisconsin Press, vol. 54(2), pages 190-199.
- Quigg, Laura, 1993. " Empirical Testing of Real Option-Pricing Models," Journal of Finance, American Finance Association, vol. 48(2), pages 621-40, June.
- DiPasquale, Denise & Somerville, C. Tsuriel, 1995. "Do House Price Indices Based on Transacting Units Represent the Entire Stock? Evidence from the American Housing Survey," Journal of Housing Economics, Elsevier, vol. 4(3), pages 195-229, September.
- James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
- Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
- DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January.
- Stover, Mark Edward, 1986. "The price elasticity of the supply of single-family detached urban housing," Journal of Urban Economics, Elsevier, vol. 20(3), pages 331-340, November.
- David Genesove & Christopher J. Mayer, 1994.
"Equity and Time to Sale in the Real Estate Market,"
NBER Working Papers
4861, National Bureau of Economic Research, Inc.
- Genesove, D. & Mayer, C.J., 1994. "Equity and Time to Sale in the Real Estate Market," Working papers 94-02, Massachusetts Institute of Technology (MIT), Department of Economics.
- David Genesove & Christopher J. Mayer, 1993. "Equity and time to sale in the real estate market," Working Papers 93-6, Federal Reserve Bank of Boston.
- Wheaton, William C., 1982. "Urban residential growth under perfect foresight," Journal of Urban Economics, Elsevier, vol. 12(1), pages 1-21, July.
- Olsen, Edgar O., 1987. "The demand and supply of housing service: A critical survey of the empirical literature," Handbook of Regional and Urban Economics, in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 25, pages 989-1022 Elsevier.
- Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
- Jon Faust, 1993. "Near observational equivalence and unit root processes: formal concepts and implications," International Finance Discussion Papers 447, Board of Governors of the Federal Reserve System (U.S.).
- Christopher J. Mayer & C. Tsuriel Somerville, 1996. "Regional housing supply and credit constraints," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 39-51.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:96-12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.