Why Has House Price Dispersion Gone Up?

Abstract

We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. In our equilibrium, house prices compensate for crosssectional wage differences. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large. *

The price of residential land in large US cities

“…We see this to be an important avenue for future research. 17 For recent papers in this literature, see Lustig and Van Nieuwerburgh [11] and Piazzesi et al [13]. 18 There is a positive covariance over time between real land prices and construction costs that also affects the variance of home prices.…”

“…The fact that the mean and variance of changes to house prices may have changed as a direct result of an increase in land's share has important implications for the optimal share of housing in a household's portfolio, and for studies that link returns to housing to returns to stocks and bonds. 17 To gauge the possible magnitudes of the change to the growth rate and variance of house prices, we consider how current land values would translate into future home-price appreciation in cities along the East and West coasts should land prices and construction costs repeat their average performance (in real terms) in recent history. From 1984 through 1998 (ignoring the current boom), these two regions experienced average annual real increases in land prices of 4.2 percent and 4.7 percent, respectively; over the same period, their real construction costs fell by an average of 0.3 percent and 0.8 percent, respectively.…”

“…Critical to this story is the idea that the supply of parcels with good commutes in an MSA is in relatively fixed supply. Glaeser et al [7], Malpezzi [12], Quigley and Raphael [14], Van Nieuwerburgh and Weill [17], and others have focused on the role that land-use regulations may play in determining the supply of parcels and the path of house prices.…”

Housing Supply

“…Other work by Van Nieuwerburgh & Weill (2006) and Gyourko et al (2006) tries to account for the growing price dispersion in house prices noted above in the discussion in Section 2. Van Nieuwerburgh & Weill (2006) use a calibrated general equilibrium island model of the economy and show that increases in the cross-sectional dispersion of wages over the past three decades can generate the observed increases in both price levels and dispersion.…”

“…Finally, there have been many other useful insights and contributions, including the one by Mayer & Somerville (2000), which correctly pointed out that a new housing unit represents a change in supply and that new housing construction should be specified as a function of changes in things like input prices, rather than their levels. Van Nieuwerburgh & Weill 2006). Although these models are intended to address a wide variety of features of the workings of housing markets, they have yielded some insights very specific to housing supply.…”