Housing Market Dynamics
Toulouse, June 2006
In these lectures, I present recent developments in our understanding of housing market fluctuations. I focus primarily on my work with Prof. Sven Rady. My first objective is to convey the contribution of our work to our understanding of the drivers of housing prices and transactions and to our understanding of the allocation of residential properties across households. Second, I believe there are lessons to be learned not only from the content of the papers, but also from the process whereby they were written. I will share with you how we got started in our research and how we struggled along the way. Third, I will explain how our research should inform your own housing consumption and investment decisions. Below is a tentative schedule. (A link to the different papers is provided on http://research.bus.wisc.edu/fom/Toulouse.htm)
Lecture 1: Housing Market Dynamics: Income Shocks and Credit Constraints • • • • • •
Motivation: Aggregate housing prices and transactions fluctuations, failures of the traditional approach Main building blocks: Housing as a consumption good, property ladder, credit constraints Basic Model: 1:0F 2:FH 3:FH Extension: first-time buyers of houses 1:0FH... Taking the theory to the data Lessons
The main reference for this lecture is Ortalo-Magne, F. and Rady S. (2006), "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints”, Review of Economic Studies, 73, 459–485.
Other relevant papers include Case, K.E. and Shiller R.J. (1989), "The Efficiency of the Market for Single-family Homes”, American Economic Review, 79, 125–137.
Lamont, O. and Stein, J.C. (1999), Leverage and House-price Dynamics in U.S. Cities”, RAND Journal of Economics, 30, 498-514. Poterba, J.N. (1991), "House Price Dynamics: The Role of Tax Policy and Demography”, Brookings Papers on Economic Activity, 2, 143-203. Stein, J.C. (1995), "Prices and Trading Volume in the Housing Market: A Model with Downpayment Effects”, Quarterly Journal of Economics, 110, 379–406. Victor Rios-Rull's slides
Lecture 2: Credit Constraints, Tenure Choice and Housing Market Fluctuations • •
Adding rented flats: credit constraint driven tenure choice Making sense of transactions in the UK: The 2 Million Question
The main references for this lecture are Ortalo-Magne, F. and Rady, S. , “Boom In, Bust Out: Young Households and the Housing Price Cycle”, European Economic Review, 43, 755–766. Ortalo-Magne, F. and Rady, S. (2004), “Housing Transactions and Macroeconomic Fluctuations: A Case Study of England and Wales”, Journal of Housing Economics, 13, 288– 304.
Other relevant papers include Andrew, M. and Meen, G. (2003b), “Housing Transactions and the Changing Decisions of Young Households in Britain: The Microeconomic Evidence”, Real Estate Economics, 31, 117–138. Benito, A. (2004), “The Down-Payment Constraint and UK Housing Markets: Does the Theory Fit the Facts?" Journal of Housing Economics, 15, 1–20. Chiuri, M.C. and Jappelli, T. (2003), “Financial Market Imperfections and Home Ownership: A Comparative Study”, European Economics Review, 47, 857–875. Muellbauer, J. and Murphy, A. (1997), “Booms and Busts in the UK Housing Market”, Economic Journal, 107, 1701–1727. Ortalo-Magne, F. and Rady, S. (2000), “The Rise and Fall of Residential Transactions in England and Wales'' (Research Report, Council of Mortgage Lenders, London).
Lecture 3: Risk, Tenure Choice and your Local Housing Market • • •
The hedging benefits of homeownership Neighborhood composition The cab driver, the banker and the academic
The main references for this section are Ortalo-Magne, F. and S. Rady (2002), “Tenure Choice and the Riskiness of Non-Housing Consumption”, Journal of Housing Economics, 11, 266–279. Ortalo-Magne, F. and Rady, S. (2006), “Heterogeneity within Communities: A Stochastic Model with Tenure Choice”, working paper.
Other relevant papers include Epple, D. and H. Sieg (1999) , “Estimating Equilibrium Models of Local Jurisdictions”, Journal of Political Economy, 107, 645–681. Sinai, T. and N. Souleles (2005), “Owner-Occupied Housing as a Hedge Against Rent Risk”, Quarterly Journal of Economics, 120, 763–789.
