Working Paper: NBER ID: w14193
Authors: Edward L. Glaeser; Joseph Gyourko; Albert Saiz
Abstract: Like many other assets, housing prices are quite volatile relative to observable changes in fundamentals. If we are going to understand boom-bust housing cycles, we must incorporate housing supply. In this paper, we present a simple model of housing bubbles that predicts that places with more elastic housing supply have fewer and shorter bubbles, with smaller price increases. However, the welfare consequences of bubbles may actually be higher in more elastic places because those places will overbuild more in response to a bubble. The data show that the price run-ups of the 1980s were almost exclusively experienced in cities where housing supply is more inelastic. More elastic places had slightly larger increases in building during that period. Over the past five years, a modest number of more elastic places also experienced large price booms, but as the model suggests, these booms seem to have been quite short. Prices are already moving back towards construction costs in those areas.
Keywords: Housing; Bubbles; Supply Elasticity; Urban Economics
JEL Codes: G12; R1; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Elastic housing supply (R31) | Fewer and shorter housing bubbles (E32) |
| Elastic housing supply (R31) | Smaller price increases during bubbles (E31) |
| Elastic housing supply (R31) | Greater welfare consequences of bubbles (D69) |
| Inelastic housing supply (R31) | Larger price run-ups during bubbles (E32) |
| Inelastic housing supply (R31) | Larger price drops post-bubble (D49) |
| Elastic housing supply (R31) | Moderates price impact of bubbles (E32) |
| Inelastic housing supply (R31) | Longer bubble durations (E32) |
| Housing supply elasticity (R31) | Price dynamics during housing booms and busts (E32) |