Housing and Capitalization

7/25/2019 Housing and Capitalization

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Danny Shoag

Lecture 7: Housing & Capitalization


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Overview! We are looking for a framework for how regional economies work

! We attack this by attacking the first order fact big income gaps

! We saw that capital was pretty mobile within countries: unlikely that

capital accumulation is cause

! Looked at the evidence for two kinds of immobile inputs:agglomeration (knowledge, labor pooling) and market access

! We looked at the spatial equilibrium model both within and across cities

! We saw that labor migration was responsive to unemployment, though ithasnt closed income gaps

! Today we explore how housing prices are set and the role they play in

this framework


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Last time!

Utility = Wages Rent + Amenities Transportation Costs

! City line divides a NH street:

Fischel House in Bow House in Concord

Property Tax Rate 2% 5%

Price $200,000 $160,000

10% Mortgage

Property Tax

Annual Cost


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Last time

! Utility = Wages Rent + Amenities Transportation Costs



Price $200,000 $160,000

10% Mortgage $20,000 $16,000

Property Tax

Annual Cost


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Last time




Price $200,000 $160,000

10% Mortgage $20,000 $16,000

Property Tax $4,000 $8,000

Annual Cost


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Last time




Price $200,000 $160,000

10% Mortgage $20,000 $16,000

Property Tax $4,000 $8,000

Annual Cost $24,000 $24,000


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Questions

! Why dont developers just build in Bow and earn $200,000

per house rather than $160,000?

! Would it matter if you paid cash instead of a mortgage?

!

What assumptions does this result depend upon?


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Numerous Studies on Capitalization

! Housing prices often treated as a sufficient summary statistic

for the welfare effects of a policy:

! Taxes

! Environment

! Crime

! Traffic

! Development policies

! etc


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But wait

! Theres a supply side to housing too.

!

Why does housing ever deviate from the cost ofconstruction?


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Inelastic Housing

! When the supply of housing does not respond to the price,

we say its inelastic.

! When this is true, all amenity differences are capitalized


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Perfectly Elastic Housing

! When the supply of housing is infinite, we say its perfectlyelastic


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Welfare distribution

! Suppose an amenity raises the value of a house by $1.! This is that upward shift in demand

! What is the increase in welfare:

! For existing owners?

!

For people moving in?


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How does the shock change welfare?

! Who benefits?

! What happens to Prices?


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What is welfare? The elastic case


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How does the shock change welfare?

! Who benefits?

! What happens to prices?


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Trade Off of Housing Supply

Benefit:

More people enjoy

amenity

Con:

Existing owners do not

enjoy increase in pricesMay not invest in amenity


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Existing land use and welfare

! Measure welfare through development and prices

! Own lot, external, and supply effects are all negative.

! Identification worries?


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Learning from Recent Data:

Housing Prices and School Quality

Parents are willing to pay 2.5% more for a 5% increase in test scores


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Hilber and Mayer


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Hilber and Mayer

! Housing prices are more responsive to amenities whensupply is less elastic


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Hilber and Mayer

! When faced with an exogenous cap on rates, places with lessopen land overrode the provision more frequently and spent

more

! Places with old people or homeowners that have little

undeveloped land spend more than similar places with lots of

undeveloped land


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Capitalization, Property Taxes, and

Government Discipline

! Why do local governments rely on a property tax?! Traditional answer : low elasticity of supply reduces deadweight

loss.

! Ed Glaeser argues that property taxes can discipline corrupt

governments:

!

Will need to maintain good amenities values! People and prices are forward looking, so governments need to

invest in the future


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A quick aside: Housing and Unemployment

!

Housing can slow adjustment/increase unemployment if itreduces mobility


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Relationship within the USA


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Underwater homes and rising interest

rates

! Both are linked to lower mobility, though the evidence is notperfect


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Back to our framework

! Our Puzzle Part 1:

Why are some still so much richer?

! Our Answer Part 1:

They have some fixed, non-exportable features

! Our Puzzle Part 2:

Why dont people move to eliminate these incomedifferences?

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Housing and Capitalization