On Local Housing Supply Elasticity

Abstract

Housing markets have been established as fundamental to understanding business cycles, financial market stability, labor mobility, household wealth, individual portfolio allocation, and urban dynamics. What determines local housing supply elasticities and prices? In this paper I give empirical content to the concept of land availability by processing satellite-generated data on elevation and presence of water bodies to precisely estimate the amount of developable land in each metro area. I demonstrate that development is effectively curtailed by the presence of slopes above 15% and that most areas that are widely regarded as supply-inelastic are, in fact, severely land-constrained by their topography. Furthermore, the extent of topographical constraints correlates positively and strongly with regulatory barriers to development. Immigration, high taxes, politics, and "communitarian" social capital are also predictive of more restrictive residential land regulations. I estimate a system of equations where housing prices, construction, and regulations are all determined endogenously. Housing supply elasticities can be well-characterized as functions of both physical and regulatory constraints, which in turn are endogenous to prices and past growth. The results provide operational estimates of local supply elasticities in all major US metropolitan areas.

Keywords: Housing supply, topography, growth controls

JEL Classification: R31, R10, R14