Land Use Regulations, Migration and Rising House Price Dispersion in the U.S.

105 Pages Posted: 9 Jul 2018

See all articles by Wukuang Cun

Wukuang Cun

Shanghai University of Finance and Economics - Department of Finance

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Date Written: April 10, 2018

Abstract

This paper develops a dynamic spatial equilibrium model of regional housing markets in which house prices are jointly determined with migration flows. Agents optimize period-by-period and decide whether to remain where they are or migrate to a new location at the start of each period. The gain from migration depends on the differences in incomes, housing and migration costs. The agent’s optimal location choice and the resultant migration process is shown to be Markovian with the transition probabilities across all location pairs given as non-linear functions of income and housing cost differentials, which are endogenously determined. On the supply side, in each location the construction firms build new houses by combing land and residential structures. The regional land supplies are exogenously given. When a tightening of regional land-use regulation reduces local housing supply, upward pressure on house prices created by excess housing demand cascades to other locations via migration. It is shown that the deterministic version of the model has a unique equilibrium and a unique balanced growth path. We estimate the state-level supplies of new residential land from the model using housing market and urban land acreage data. These estimates are shown to be significantly negatively correlated with the Wharton Residential Land Use Regulatory Index. The model can simultaneously account for the rise in house price dispersion and the interstate migration in the U.S. during the period 1976-2014. Counterfactual simulations suggest that reducing either land supply differentials or migration costs could significantly lower house price dispersion. The model predicts substantially smaller impacts of land-use deregulation on population reallocation as compared to recent existing models of housing and migration that assume population are perfectly mobile.

Keywords: house price dispersion, endogenous location choice, interstate migration, land-use restriction, spatial equilibrium

JEL Classification: E00, R23, R31

Suggested Citation

Cun, Wukuang and Pesaran, M. Hashem, Land Use Regulations, Migration and Rising House Price Dispersion in the U.S. (April 10, 2018). CESifo Working Paper Series No. 7007, Available at SSRN: https://ssrn.com/abstract=3198480

Wukuang Cun

Shanghai University of Finance and Economics - Department of Finance ( email )

Shanghai, 200433
China

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

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