Supply constraints and housing market dynamics
Although the volatility of house prices is often ascribed to demand-side factors, constraints on housing supply have important and little-studied implications for housing dynamics. I illustrate the strong relationship in city-level data between the volatility of house prices and the regulation of new housing supply. I then employ a dynamic structural model of housing investment to estimate the effect of supply constraints on both the level of new construction and the responsiveness of investment to house prices. I find that supply constraints increase volatility through two channels: First, regulation lowers the elasticity of new housing supply by increasing lags in the permit process and adding to the cost of supplying new houses on the margin. Second, geographic limitations on the area available for building houses, such as steep slopes and water bodies, lead to less investment on average relative to the size of the existing housing stock, leaving less scope for the supply response to attenuate the effects of a demand shock. My estimates and simulations confirm that regulation and geographic constraints play critical and complementary roles in decreasing the responsiveness of investment to demand shocks, which in turn amplifies house price volatility.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
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.:
- Matthew J. Notowidigdo, 2011.
"The Incidence of Local Labor Demand Shocks,"
NBER Working Papers
17167, National Bureau of Economic Research, Inc.
- Glaeser, Edward & Saiz, Albert & Gyourko, Joseph, 2008.
"Housing Supply and Housing Bubbles,"
2962640, Harvard University Department of Economics.
- Christopher J. Mayer & C. Tsuriel Somerville, .
"Land Use Regulation and New Construction,"
Zell/Lurie Center Working Papers
331, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Fernando Ferreira & Joseph Gyourko & Joseph Tracy, 2008.
"Housing Busts and Household Mobility,"
NBER Working Papers
14310, National Bureau of Economic Research, Inc.
- Huang, Haifang & Tang, Yao, 2010.
"Residential Land Use Regulation and the US Housing Price Cycle Between 2000 and 2009,"
2010-11, University of Alberta, Department of Economics, revised 01 Nov 2010.
- Huang, Haifang & Tang, Yao, 2012. "Residential land use regulation and the US housing price cycle between 2000 and 2009," Journal of Urban Economics, Elsevier, vol. 71(1), pages 93-99.
- 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.
- Calabrese, Stephen & Epple, Dennis & Romano, Richard, 2007. "On the political economy of zoning," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 25-49, February.
- Hanushek, Eric A & Quigley, John M, 1980. "What Is the Price Elasticity of Housing Demand?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 449-54, August.
- Robert Miller & Peter Arcidiacono, 2008. "CCP Estimation of Dynamic Discrete Choice Models with Unobserved Heterogeneity," 2008 Meeting Papers 1065, Society for Economic Dynamics.
- Dennis Epple & Brett Gordon & Holger Sieg, 2010. "A New Approach to Estimating the Production Function for Housing," American Economic Review, American Economic Association, vol. 100(3), pages 905-24, June.
- Quigley, John M. & Raphael, Steven, 2006.
"Regulation and the High Cost of Housing in California,"
Berkeley Program on Housing and Urban Policy, Working Paper Series
qt3hh7s35m, Berkeley Program on Housing and Urban Policy.
- John M. Quigley & Steven Raphael, 2005. "Regulation and the High Cost of Housing in California," American Economic Review, American Economic Association, vol. 95(2), pages 323-328, May.
- V. Joseph Hotz & Robert A. Miller, 1993. "Conditional Choice Probabilities and the Estimation of Dynamic Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 497-529.
- Michael P. Keane & Kenneth I. Wolpin, 1995.
"The career decisions of young men,"
559, Federal Reserve Bank of Minneapolis.
- Timothy J. Bartik, 2003. "Local Economic Development Policies," Upjohn Working Papers and Journal Articles 03-91, W.E. Upjohn Institute for Employment Research.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2012-01. 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: (Marlene Vikor)
If references are entirely missing, you can add them using this form.