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The Diversity of Neighborhood Transitions


  • Sharon I. O'Donnell


Long-term observers of urban communities know that the housing quality distributions of communities and the changes of these distributions over time encompass not one but a variety of patterns. The equilibrium outcome derived from the housing market literature explains one pattern of change. Using Rust's stochastic equilibrium model of durable goods (Econometrica, 1985), we determine that the market can generate a set of patterns depending upon the degree of heterogeneity of homeowners, the underlying technology of the structures and the developer's demand for land. The paper presents a dynamic model of homeowner choice, given a market with new and existing structures of varying quality and a renewal process that describes the deterioration and replacement rates of these structures. There is a continuum of homeowners that differ by taste. Given the developer's price for new construction, the scrap price for sub-quality structures, and equilibrium bids of homeowner types in the market, heterogeneous homeowners sort along a holding distribution of homes. This paper describes the conditions for the existence and stability of stochastic equilibrium outcome. We find that long-run demand/bid function is the upper envelope of the bid functions of the individual types of homeowners in the market. The heterogeneous population (or diversity of preferences) leads to variations in the range of quality demanded for residential services and variations in optimal holding times for homes. Diversity also lead to utility gains for all homeowners.

Suggested Citation

  • Sharon I. O'Donnell, 2001. "The Diversity of Neighborhood Transitions," Computing in Economics and Finance 2001 265, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:265

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    More about this item


    Housing markets; Stochastic dynamic programming;

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium


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