Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy
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Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy
Dr. Bryce Ward
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Economics, Not Fashion
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What does it mean to say housing is affordable?
Affordable if:
Thus, we need to understand housing markets and labor markets
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Framework for understanding housing markets
Demand = desirabilitySupply = availability
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What makes a house desirable? Why is there demand?
• Two parts:• Physical Characteristics: square feet, number of bed rooms,
year built, flooring type, air conditioning, lot size• Location: in which city/region is it located, and which part of the
city? • Across cities people care about: proximity to high wage jobs
(productivity), pleasant climate, desirable cultural, recreational, and consumer amenities (quality of life), and other cost differences (cost of living)
• Within regions, differences in desirability reflect differential proximity to work, good schools, parks, shopping, crime, etc.
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What determines availability or supply?
Is there land that one can build on near desirable places? This depends on:
• The amount of developable land (not underwater, not too steep, not otherwise protected) near desirable places
How hard/expensive is it to put housing on that land? This depends on two factors:
• Availability of building materials• Stringency of regulation
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Putting demand and supply together. What’s the price of housing in Portland?
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Metro area differences
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Differences in housing prices across place reflect
•Differences in wages/productivity
•Differences in quality of life
•Differences in land availability
•Differences in land use regulation
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Differences within Portland
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$0
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Source: Zillow Home Price Index for Portland Neighborhoods
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Rent and distance to city center in Portland
Source: Wilson and Frew (2007)
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Affordability must include all costs related to location
Affordability metric=
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Issues to watch (numerator)
• Housing prices: Home values crash and starting to recover, declines in ownership put pressure on rents, fed commitment to low rates should help speed recovery
• Commuting costs: Rising gas prices may lead to higher home prices in places with shorter commutes
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Income and the labor market
• (1) Rising inequality (stagnant or declining income for most, but enormous gains for a few)
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Income and the labor market
(2) Stagnant mobility (Kopczuk and Saez 2007)
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Why?
•Skill-biased technological change
•Globalization
•Weaker labor market institutions
•Polarization of the labor market
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Declining Housing Affordability
• Over the long run, housing prices and cost have risen faster than income for a larger swath of the population.
• In 1990, Portland’s median renter’s gross rent was less than 23% of household income.
• In 2010, Portland’s median renter’s gross rent was nearly 29% of household income.
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How to address affordability?
• Decrease numerator• Lower housing prices
• Increase supply (availability)• Decrease demand(desirability)
• Lower related costs (e.g., commute)
• Increase denominator• Raise income (increase productivity – particularly of
the traded sector)
• If not addressed, over the long-run, people (particularly lower income people) will move elsewhere.