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Abstract
The long-run price elasticity for alternative specifications of new housing supply is estimated using U.S. annual data for 1950 through 1994. The basic model expresses residential construction as a linear function of new housing price and the prices of construction inputs. Long-run elasticities range from 1.6 to 3.7, suggesting that new housing supply is price elastic. Residential construction responds to both the real interest and expected in[empty set]ation rates, but other construction cost variables perform poorly. However, the results are sensitive to the timeseries processes underlying the variables. A modified model that expresses residential construction as a function of changes in input prices, rather than their levels, produces a long-run elasticity of about 0.8 and a significant inverse relationship between new housing supply and the construction wage rate.
Key Words: U.S. housing supply, residential construction
The supply of housing in the United States plays a critical role in determining housing market outcomes, yet for a variety of reasons it has been the focus of relatively little empirical analysis. Studies focusing on household behavior in the housing market are relatively plentiful and address a wide range of issues, including the demand for housing services, the demand for housing or neighborhood amenities, the demand for new or existing homes, tenure choice, locational choice, and mortgage choice. Limiting his survey to the market for housing service, Olsen (1987, p. 1015) reports that ``empirical studies of the supply of housing service are as scarce as studies of its demand are abundant.''
Housing demand is affected by several factors, including changes in tax policy, the age composition of the population, and the rate of household formation. However, the net impact on housing prices and availability cannot necessarily be determined from demand analysis alone. For example, the net effect of scaling back or eliminating the deductibility of mortgage interest depends on both demand and supply responses. Similarly, Mankiw and Weil's (1989) much-discussed prediction that real housing prices will fall by 47% by the year 2007 re[empty set]ect, in part, the underlying housing supply elasticity. Mankiw and Weil find that changes in housing demand have a substantial impact on housing prices and explain this result by suggesting that housing demand and supply are both highly inelastic. Critics argue that housing...