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Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy

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  • J. Scott Davis
  • Kevin X. D. Huang
  • Ayse Sapci

    ()

Abstract

Changes in housing demand can have a macroeconomic effect through the collateral channel, where the change in residential real estate prices is associated with a change in commercial real estate prices, affecting firm collateral and thus firm investment. We argue that this channel is weaker when residential and commercial real estate are poor substitutes. Using cross-state heterogeneity in the strength of zoning regulations as a proxy for heterogeneity in the substitutability of residential and commercial real estate, we first show with firm level data that the strength of local zoning regulations has a negative effect on the estimated increase in firm investment following an increase in local residential real estate prices. We then construct a DSGE model where land has both residential and commercial uses and estimate it using Bayesian techniques and U.S. macroeconomic data. We find the average elasticity of substitution between commercial and residential real estate in the U.S. to be around 0.35, but in states with strong zoning restrictions it can be as low as 0.16 and in states with weak zoning restrictions it can be as high as 0.66. Simulations of the model show how these differences in zoning restrictions can affect the transmission of a housing demand shock to the macroeconomy.

Suggested Citation

  • J. Scott Davis & Kevin X. D. Huang & Ayse Sapci, 2020. "Imperfect Substitutability in Real Estate Markets and the Effect of Housing Demand on the Macroeconomy," Globalization Institute Working Papers 401, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:88828
    DOI: 10.24149/gwp401
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    References listed on IDEAS

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    1. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    2. Zheng Liu & Pengfei Wang & Tao Zha, 2019. "A Theory of Housing Demand Shocks," Working Paper Series 2019-9, Federal Reserve Bank of San Francisco.
    3. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2015. "House prices, collateral, and self-employment," Journal of Financial Economics, Elsevier, vol. 117(2), pages 288-306.
    4. Joseph Gyourko & Jonathan Hartley & Jacob Krimmel, 2019. "The Local Residential Land Use Regulatory Environment Across U.S. Housing Markets: Evidence from a New Wharton Index," NBER Working Papers 26573, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Commercial real estate; residential real estate; housing demand shock; zoning;

    JEL classification:

    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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