Working Paper: NBER ID: w12538
Authors: Stijn Van Nieuwerburgh; Pierre-Olivier Weill
Abstract: We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. In equilibrium, workers flow towards exceptionally productive metropolitan areas and drive house prices up. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large.
Keywords: house prices; wage dispersion; housing supply regulation; metropolitan areas
JEL Codes: E24; R12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in cross-sectional wage dispersion (J31) | increase in house price dispersion (R31) |
| increase in productivity dispersion (O49) | workers flow towards high-productivity areas (J61) |
| workers flow towards high-productivity areas (J61) | local house prices increase (R31) |
| tightening of housing supply regulation (R31) | no significant effect on house price levels (R31) |
| households migrate from tightly regulated areas (R23) | mitigate price increases (E64) |
| sensitivity of house prices to wages increases over time (J39) | regression slope on house prices relative to wages rises (J39) |
| productivity shocks (O49) | house price changes (R31) |