A Dynamic Model of the Housing Market: The Role of Vacancies

A Dynamic Model of the Housing Market: The Role of Vacancies While the hedonic property value model and recently developed computable general equilibrium urban models assume the housing market is in equilibrium, recent years have witnessed extreme circumstances such as large changes in housing prices, high levels of mortgage default, and high levels of foreclosure that bring into question this assumption. This highlights the need for a better understanding of the dynamics of the housing market and the mechanisms that drive and sustain periods of disequilibrium. In this analysis, I develop a dynamic model of the housing market where vacancies naturally arise as the error correction mechanism. I estimate this model using annual U.S. panel data at the MSA level for 1990–2011. The results show that when there is excess demand, prices rise when vacancies fall but prices do not fall when there is excess supply and vacancies rise. This is consistent with the belief that prices are sticky downwards and hence prolong housing downturns. On the other hand, when there is excess supply, there is a relatively stronger decline in new housing in response to a rise in vacancies and much less of a new housing reaction when there is excess demand and vacancies fall. Furthermore, when I allow for a structural shift in the housing market brought on by the Great Recession (2006–2011), I find that the housing market became more responsive on both sides – excess supply and demand – during this period. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

A Dynamic Model of the Housing Market: The Role of Vacancies

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-014-9466-z
Publisher site
See Article on Publisher Site

Abstract

While the hedonic property value model and recently developed computable general equilibrium urban models assume the housing market is in equilibrium, recent years have witnessed extreme circumstances such as large changes in housing prices, high levels of mortgage default, and high levels of foreclosure that bring into question this assumption. This highlights the need for a better understanding of the dynamics of the housing market and the mechanisms that drive and sustain periods of disequilibrium. In this analysis, I develop a dynamic model of the housing market where vacancies naturally arise as the error correction mechanism. I estimate this model using annual U.S. panel data at the MSA level for 1990–2011. The results show that when there is excess demand, prices rise when vacancies fall but prices do not fall when there is excess supply and vacancies rise. This is consistent with the belief that prices are sticky downwards and hence prolong housing downturns. On the other hand, when there is excess supply, there is a relatively stronger decline in new housing in response to a rise in vacancies and much less of a new housing reaction when there is excess demand and vacancies fall. Furthermore, when I allow for a structural shift in the housing market brought on by the Great Recession (2006–2011), I find that the housing market became more responsive on both sides – excess supply and demand – during this period.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: May 22, 2014

References

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