IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/03-9.html
   My bibliography  Save this paper

Urban decline and housing reinvestment: the role of construction costs and the supply side

Author

Listed:
  • Joseph Gyourko
  • Albert Saiz

Abstract

Negative demand shocks have afflicted many American cities in the 20th century and are the main explanation for their decaying housing markets. But what is the role of housing supply? Rational entrepreneurs should not invest in new buildings and renovation when home values are below replacement cost. Households with an investment motive should behave similarly. Empirically, the authors find that construction costs are not very sensitive to building activity but do vary with local income, unionization rates in the construction sector, the level of local regulation, and region. They also document that the variance in building costs generates substantial variance in renovation expenditures across cities. Owner-occupied homes with market values below replacement costs spend about 50 percent less on renovation than similar homes with market values above construction costs. The authors also report on the distribution of the ratio of house value-to-construction cost across markets. The distribution is relatively flat in a number of declining cities, especially older manufacturing areas. In these places, a relatively modest 10 percent decline in replacement costs would find between 7-15 percent of the local housing stock moving from being valued below cost to above cost. Even though modest declines in construction costs are unlikely to change basic urban trends, the authors' results suggest they can be an important factor in determining whether various neighborhoods in declining cities will experience any significant reinvestment. In this respect, declining cities truly cannot afford to be expensive cities in terms of replacement costs: urban scholars and policy makers should begin to pay more attention to the cost side of cities.

Suggested Citation

  • Joseph Gyourko & Albert Saiz, 2003. "Urban decline and housing reinvestment: the role of construction costs and the supply side," Working Papers 03-9, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:03-9
    as

    Download full text from publisher

    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2003/wp03-9.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Edward L. Glaeser, Jed Kolko, and Albert Saiz, 2001. "Consumer city," Journal of Economic Geography, Oxford University Press, vol. 1(1), pages 27-50, January.
    2. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-1278, December.
    3. Joseph Gyourko & Joseph Tracy, 2006. "Using Home Maintenance and Repairs to Smooth Variable Earnings," The Review of Economics and Statistics, MIT Press, pages 736-747.
    4. Edward L. Glaeser & Joseph Gyourko, 2005. "Urban Decline and Durable Housing," Journal of Political Economy, University of Chicago Press, pages 345-375.
    5. Freeman, Richard B, 1984. "Longitudinal Analyses of the Effects of Trade Unions," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 1-26, January.
    6. Goodman, John Jr. & Ittner, John B., 1992. "The accuracy of home owners' estimates of house value," Journal of Housing Economics, Elsevier, vol. 2(4), pages 339-357, December.
    7. Stuart S. Rosenthal, 1999. "Residential Buildings And The Cost Of Construction: New Evidence On The Efficiency Of The Housing Market," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 288-302, May.
    8. Reschovsky, James D, 1992. "An Empirical Investigation into Homeowner Demand for Home Upkeep and Improvement," The Journal of Real Estate Finance and Economics, Springer, vol. 5(1), pages 55-71, March.
    9. Stephen E. Margolis, 1981. "Depreciation and Maintenance of Houses," Land Economics, University of Wisconsin Press, vol. 57(1), pages 91-105.
    10. Richard Arnott & Russell Davidson & David Pines, 1983. "Housing Quality, Maintenance and Rehabilitation," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 467-494.
    11. Richard B. Freeman & James L. Medoff, 1983. "Trade Unions and Productivity: Some New Evidence on an Old Issue," NBER Working Papers 1249, National Bureau of Economic Research, Inc.
    12. Thomas P. Boehm & Keith R. Ihlanfeldt, 1986. "The Improvement Expenditures of Urban Homeowners: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(1), pages 48-60.
    13. Bogdon, Amy S., 1996. "Homeowner Renovation and Repair: The Decision to Hire Someone Else to Do the Project," Journal of Housing Economics, Elsevier, vol. 5(4), pages 323-350, December.
    14. Nelson, Forrest & Olson, Lawrence, 1978. "Specification and Estimation of a Simultaneous-Equation Model with Limited Dependent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(3), pages 695-709, October.
    15. Mendelsohn, Robert, 1977. "Empirical evidence on home improvements," Journal of Urban Economics, Elsevier, vol. 4(4), pages 459-468, October.
    16. Knight, John R. & Sirmans, C. F., 1996. "Depreciation, Maintenance, and Housing Prices," Journal of Housing Economics, Elsevier, vol. 5(4), pages 369-389, December.
    17. Edward L. Glaeser & Joseph Gyourko, 2003. "The impact of building restrictions on housing affordability," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 21-39.
    18. Freeman, Richard B & Medoff, James L, 1981. "The Impact of the Percentage Organized on Union and Nonunion Wages," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 561-572, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Arthur Grimes & Suzi Kerr & Andrew Aitken, 2004. "Bi-Directions Impacts of Economic, Social and Environmental Changes and the New Zealand Housing Market," Working Papers 04_09, Motu Economic and Public Policy Research.
    2. Bento, Antonio M. & Franco, Sofia F. & Kaffine, Daniel T., 2011. "Welfare Effects of Anti-Sprawl Policies in the Presence of Urban Decline," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 40(3), December.
    3. Kazi Saiful ISLAM, 2009. "Challenges Of Urban Planning At The Face Of Counter-Urbanization," Theoretical and Empirical Researches in Urban Management, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 4(2(11)), pages 152-165, May.
    4. Harding, John P. & Rosenthal, Stuart S. & Sirmans, C.F., 2007. "Depreciation of housing capital, maintenance, and house price inflation: Estimates from a repeat sales model," Journal of Urban Economics, Elsevier, vol. 61(2), pages 193-217, March.

    More about this item

    Keywords

    Urban economics ; Construction industry ; Supply-side economics;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:03-9. 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: (Beth Paul). General contact details of provider: http://edirc.repec.org/data/frbphus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.