Professional Documents
Culture Documents
Prof. Clark
Week #12
Urban Housing Markets
Brief summary
Spatial patterns in the housing market
Recall insights of SUM regarding K-Land ratio
as you move away from place of employment
Look at some of the characteristics
associated with the housing good
Characteristics of the Housing
Good
Uniqueness
Features, locational fixity.
There are neighborhood effects
Positive and negative externalities
Long-lived
Stock of housing generates a flow of services.
Housing deteriorates over time without
maintenance.
Consumption and investment good
Has been seen as a hedge against inflation
• More later
Characteristics - continued
[(r+p)(1-t)+ m - gr -e*t)
Thus,
higher is r, p, or m, the higher is .
higher is gr, and e, the lower is .
Housing is often seen as a hedge against
inflation (i.e., the user cost of housing falls with
increases in e).
For rental housing, the maintenance
expenses are also tax deductible:
renter[(r+p)(1-t)+ m(1-t) - gr -e*t]
User Cost for Owners & Renters
owner[(r+p)(1-t)+ m - gr -e*t]
renter[(r+p)(1-t)+ m(1-t) - gr -e*t]
owner[(ro+p)(1-t)+ mo - gr -e*t]
owner
owner
Reasons:
New housing is a small fraction of the
overall stock of housing.
Thus, it cannot lead to large quantity
adjustments (for overall market) when price
changes.
Deterioration of used buildings into the next
lower quality classification.
Deterioration is slow.
Remodeling to upgrade quality.
Expensive.
Housing Market
Equilibrium
R-Q space: V-Q space:
(Map Supply curve) (Map Demand Curve)
R S V S
Re Ve
D D
Q Q
Qe Qe
What happens when increases?
(suppose real interest rates increase)
Rent-Quantity Space
# As user cost increases, S’
the supply curve is R
mapped to higher S
R’e
values of R for the
Re
same value of Q.
Demand falls as
quality declines.
Thus TR falls.
Costs go up as
maintenance
increases.
Thus, TC rises.
Q’ Q
Quantity falls
Eventually, property falls out
of this particular submarket.
Filtering:
A change over time in the position of a
given dwelling unit within the distribution
of housing rents and prices in the
community as a whole.
As a dwelling ages, it provides less
housing services per year, cet. par.
Materials deteriorate, and technology
becomes dated.
Look at Filtering Process
Housing Quality
Low Medium High
Low X
High X
Assume Income Growth of
Highest Income Group
Adjustment in Sorting
Housing Quality
Low Medium High Higher
Low X X
X X
Income Group Middle
High X X