Housing Supply

Overview
• Understanding and predicting house price dynamics in different markets
requires understanding supply conditions

• Builders use the following inputs to provide new housing

– Land (30% cost share)
– Construction materials (15% cost share)
– Labor (55% cost share)

• The elasticity of housing supply differs across metropolitan areas

– elasticity of supply = (% Increase in quantity supplied) for a (% increase in housing price)

• Different geographical features and regulations generate different elasticities

across locations (Saiz, 2010)
– Availability of new land to build on
– Cost of establishing a foundation on unbuilt land (slope, depth of bedrock)
– Cost of repurposing land built up for obsolete uses (brownfield remediation)
– Regulatory environment
Variation in Construction Costs (Gyourko, 2009)
Variation in Housing Prices (Gyourko, 2009)
 What can explain this variation in house prices?

• There is much greater heterogeneity in in house prices than in construction costs

across markets:
– (Const. Cost)/P = 99% in Dallas vs. 27% in San Francisco Area

• Can demand differences alone account for the high land and house prices in the
‘superstar’ cities?
– The spatial equilibrium model will predict higher prices if these places have
high productivity and high amenities.

– But supply would respond to

this high prices with more
construction.

• Different supply conditions across

markets thus must help explain
house price differences
 Sources of Variation in Supply Elasticities across
Metro Areas (Saiz, 2010)

• Undevelopable Area
– Fraction of space within 50 km of each metro area’s CBD that is
unavailable for development because of
• Steep slope
• Water

• Regulations
– Wharton Residential Land Use Regulatory Index (WRI): Survey of
municipalities (2006, 2018 versions)
• Standardized to be (mean 0, standard deviation 1)
• Typical permitting time for new developments
• Number of entities required to approve new developments
• Restrictions on the types of new construction and land use
• Open space requirements
• etc.
Variation in Predictors of Housing Supply Elasticity
Variation in Predictors of Housing Supply Elasticity
 Estimating Variation in Housing Supply Elasticities

• Using data at the metro area level in 1970 and 2000, Saiz (2010) estimates
 ln Pi =  0 + 1 ln Qi +  2 (unavailable _ land i  ln Qi ) +  3 (WRI i  ln Qi ) +  i

• The elasticity of housing supply for places with positive unavailable land and
WRI is  ln Pi  ln Qi 1
= 1 +  2uli +  3WRI i  =
 ln Qi  ln Pi 1 +  2uli +  3WRI i

• Therefore, more positive coefficients mean that the relationship is more

INELASTIC
Results
Resulting Variation in Housing Supply Elasticities
Resulting Variation in Housing Supply Elasticities
 Kinked Housing Supply
• We should think of the supply elasticities we just saw as applying to positive demand
shocks only

• The housing supply function is

likely kinked at the equilibrium
point such that positive and
negative demand shocks have
different effects on prices and
quantities

• Why? Mainly because housing is

a (very) durable good
 Asymmetric Urban Growth and Decline

• Outward demand shifts D D’

Price
are resolved within the
construction timeframe of
a few years
Long-Run
Supply
• Elasticity of housing
supply determines how
much home prices vs Short-Run
quantities (population) Supply
changes

Quantity
 Dynamics of Negative Demand Shocks
This is the story of declining manufacturing cities like Detroit, Buffalo and Windsor.

Price D
D’
• (Q0,P0) is the immediate adjustment
In the equilibrium point
Long-Run
P3 Supply
• (Q1,P1) is the new equilibrium point
after 1 year P2

• No new housing is built until in the third P1

Short-Run
year (when just a little is built) to end us up P0 Supply
at the new long-run equilibrium point
(Q3,P3) Q3Q2 Q1 Q0 Quantity

• That is, cities that experience negative demand shocks have

• Big declines in home prices, with a slow recovery

• Small declines in population
 Implications for Demographic Composition

• Declining cities should have a greater fraction of low skilled residents

• Poor people care about cheap housing more than low amenities whereas rich
move out of low amenity places

• Labor market for the low skilled is more flexible – such firms can more easily
relocate to hire this labor pool