The Contribution of Land and Structure to Builder Profits and House Prices
C. Tsuriel Somerville
University of British Columbia - Division of Strategy and Business Economics
J. OF HOUSING RESEARCH
This article examines how builders' land and structure expenditures affect house prices and builders' profits. The new house market is treated as monopolistically competitive, where builders face downward-sloping demand curves for land and structure. The elasticity of these curves determines whether builders pass along increases in factor costs or absorb lower profits. Microdata from a major U.S. builder are used to estimate the markups associated with these elasticities.In the short run, profits are more sensitive to cost variations for land than for structure. Changes in house prices have the most significant effect on profit rates; market activity affects profit rates much less. Price changes affect profit rates through the markup on land (the structure markup is uncorrelated with price movements). These results imply that builders can readily pass short-run variations in structure costs on to consumers but cannot do the same for land costs.
JEL Classification: R31, R32Accepted Paper Series
Date posted: November 8, 1996
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