The Economic Implications of Housing Supply

36 Pages Posted: 18 Sep 2017 Last revised: 12 Oct 2017

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)

Date Written: September 2017

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.

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Suggested Citation

Glaeser, Edward L. and Gyourko, Joseph E., The Economic Implications of Housing Supply (September 2017). NBER Working Paper No. w23833. Available at SSRN: https://ssrn.com/abstract=3038661

Edward L. Glaeser (Contact Author)

Harvard University - Department of Economics ( email )

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Joseph E. Gyourko

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