Working Paper: NBER ID: w23833
Authors: Edward Glaeser; Joseph Gyourko
Abstract: In this essay, we review the basic economics of housing supply and the functioning of US housing markets to better understand the distribution of home prices, household wealth and the spatial distribution of people across markets. We employ a cost-based approach to gauge whether a housing market is delivering appropriately priced units. Specifically, we investigate whether market prices (roughly) equal the costs of producing the housing unit. If so, the market is well-functioning in the sense that it efficiently delivers housing units at their production cost. Of course, poorer households still may have very high housing cost burdens that society may wish to address via transfers. But if housing prices are above this cost in a given area, then the housing market is not functioning well— and housing is too expensive for all households in the market, not just for poorer ones. The gap between price and production cost can be understood as a regulatory tax, which might be efficiently incorporating the negative externalities of new production, but typical estimates find that the implicit tax is far higher than most reasonable estimates of those externalities.
Keywords: housing supply; market efficiency; regulatory constraints; household wealth
JEL Codes: D45; R12; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased demand (J23) | increased housing supply (R31) |
| regulatory constraints (L51) | higher housing prices (R31) |
| regulatory constraints (L51) | regulatory tax (gap between prices and production costs) (H29) |
| restrictive supply of housing (R31) | wealth concentration among existing homeowners (R21) |
| less restricted housing supply (R31) | increase in GDP (E20) |