Housing Supply and Housing Bubbles

60 Pages Posted: 4 Aug 2008 Last revised: 14 Oct 2022

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Joseph Gyourko

University of Pennsylvania - Real Estate Department; National Bureau of Economic Research (NBER)

Albert Saiz

IZA Institute of Labor Economics; MIT Department of Urban Studies and Planning

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Date Written: July 2008

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.

Suggested Citation

Glaeser, Edward L. and Gyourko, Joseph E. and Saiz, Albert and Saiz, Albert, Housing Supply and Housing Bubbles (July 2008). NBER Working Paper No. w14193, Available at SSRN: https://ssrn.com/abstract=1179863

Edward L. Glaeser (Contact Author)

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Joseph E. Gyourko

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Albert Saiz

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