Income Distribution and Housing Prices: An Assignment Model Approach
ETLA, Research Institute of the Finnish Economy
April 8, 2011
We present a framework for studying the relation between the distributions of income and house prices that is based on an assignment model where households are heterogeneous by incomes and houses by quality. Each household owns one house and wishes to live in one house; thus everyone is potentially both a buyer and a seller. The equilibrium distribution of prices depends on both distributions in a tractable but nontrivial manner. We show how the impact of increased inequality on house prices is in principle ambiguous, but can be inferred from data. We estimate the impact of increased income inequality between 1998 and 2007 on the distribution of house prices in 6 US metropolitan regions. We find that the increase in income inequality had a negative impact on average house prices. The impact of uneven income growth on house prices has been positive only within the top decile.
Number of Pages in PDF File: 41
Keywords: housing markets, assignment models, capitalization
JEL Classification: D31, R21
Date posted: April 9, 2011 ; Last revised: April 12, 2011
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