The dynamics of house prices, sales, construction, and population growth in response to city-specific income shocks are characterized for 106 US cities. A dynamic model of search in the housing market in which construction, the entry of buyers, house prices, and sales are determined in equilibrium is then developed. The theory generates dynamics qualitatively consistent with the observations and a version calibrated to match key features of the US housing market offers a substantial quantitative improvement over models without search. In particular, variation in the time it takes to sell induces transaction prices to exhibit serially correlated growth. (JEL D83, R21, R23, R31)We explore the consequences of time-consuming search and matching for the dynamics of house prices, sales, and construction at the city level. First, we characterize the impact of city-specific income shocks on the short-run dynamics of average house prices, home sales, construction, and population growth for a panel of US cities. We then develop a model in which the entry of new buyers and the construction of new houses in response to such shocks are endogenously determined. Our theory generates serial correlation in the growth rates of house prices and construction, even if income is strictly mean-reverting following shocks. 1 When calibrated to data on US cities our model accounts for over 80 percent of the variance of house price movements driven by city-specific income shocks and nearly half of the observed autocorrelation of house price growth.In our empirical analysis, we estimate a structural panel vector autoregressive (VAR) model using city-level observations on the variables listed above. We focus 1 This behavior has been referred to as "price momentum" in the literature (e.g., Glaeser et al. 2011).
We show how a Schumpeterian process of creative destruction can induce rational, herdbehavior by entrepreneurs across diverse sectors of the economy that may look like it is fuelled by "animal spirits". Consequently, a multi-sector economy, in which sector-specific, productivity improvements are made by independent, profit-seeking entrepreneurs, can exhibit regular booms, slowdowns and downturns as an inherent part of the long-run growth process. The cyclical equilibrium that we study has a higher average growth rate but lower welfare than the corresponding acyclical one. We find that across cycling economies, a negative relationship emerges between volatility and growth, and that the cycles generated by our model exhibit several features of actual business cycles.
We characterize an equilibrium development process driven by the interaction of the distribution of wealth with credit constraints and the distribution of entrepreneurial skills. When efficient entrepreneurs are relatively abundant, a ''traditional'' development process emerges in which the evolution of macroeconomic variables accord with empirical regularities and income inequality traces out a Kuznets curve. If, instead, efficient entrepreneurs are relatively scarce, the model generates long-run ''distributional cycles'' driven by the endogenous interaction between credit constraints, entrepreneurial efficiency and equilibrium wages.
The relationships among geographical mobility, unemployment and the value of owner-occupied housing are studied in an economy with heterogeneous locations and search frictions in the markets for both labour and houses. Di¤erences in labour market conditions between cities a¤ect the speed with which houses may be sold-that is, the liquidity of housing. At the same time housing market conditions a¤ect employment decisions and thus the allocation of labour across cities. In equilibrium, unemployment rates for home-owners are higher than for otherwise identical renters. Unemployment and home-ownership rates are, however, negatively correlated across cities. In a parameterized example we …nd that, although renters are much more mobile than owners, the impact of home-ownership on aggregate unemployment is quantitatively small.Journal of Economic Literature Classi…cation: : J61, J64, R23
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