1

Polka Dots and Stripes: Mismatch Between Supply and Demand in a Changed Economy

Dr. Bryce Ward

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Economics, Not Fashion

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What does it mean to say housing is affordable?

Affordable if:

Thus, we need to understand housing markets and labor markets

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Framework for understanding housing markets

Demand = desirabilitySupply = availability

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What makes a house desirable? Why is there demand?

• Two parts:• Physical Characteristics: square feet, number of bed rooms,

year built, flooring type, air conditioning, lot size• Location: in which city/region is it located, and which part of the

city? • Across cities people care about: proximity to high wage jobs

(productivity), pleasant climate, desirable cultural, recreational, and consumer amenities (quality of life), and other cost differences (cost of living)

• Within regions, differences in desirability reflect differential proximity to work, good schools, parks, shopping, crime, etc.

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What determines availability or supply?

Is there land that one can build on near desirable places? This depends on:

• The amount of developable land (not underwater, not too steep, not otherwise protected) near desirable places

How hard/expensive is it to put housing on that land? This depends on two factors:

• Availability of building materials• Stringency of regulation

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Putting demand and supply together. What’s the price of housing in Portland?

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Metro area differences

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Differences in housing prices across place reflect

•Differences in wages/productivity

•Differences in quality of life

•Differences in land availability

•Differences in land use regulation

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Differences within Portland

Jul 1

996

Jan 1

997

Jul 1

997

Jan 1

998

Jul 1

998

Jan 1

999

Jul 1

999

Jan 2

000

Jul 2

000

Jan 2

001

Jul 2

001

Jan 2

002

Jul 2

002

Jan 2

003

Jul 2

003

Jan 2

004

Jul 2

004

Jan 2

005

Jul 2

005

Jan 2

006

Jul 2

006

Jan 2

007

Jul 2

007

Jan 2

008

Jul 2

008

Jan 2

009

Jul 2

009

Jan 2

010

Jul 2

010

Jan 2

011

Jul 2

011

Jan 2

012

Jul 2

012

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

Source: Zillow Home Price Index for Portland Neighborhoods

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Rent and distance to city center in Portland

Source: Wilson and Frew (2007)

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Affordability must include all costs related to location

Affordability metric=

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Issues to watch (numerator)

• Housing prices: Home values crash and starting to recover, declines in ownership put pressure on rents, fed commitment to low rates should help speed recovery

• Commuting costs: Rising gas prices may lead to higher home prices in places with shorter commutes

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Income and the labor market

• (1) Rising inequality (stagnant or declining income for most, but enormous gains for a few)

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Income and the labor market

(2) Stagnant mobility (Kopczuk and Saez 2007)

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Why?

•Skill-biased technological change

•Globalization

•Weaker labor market institutions

•Polarization of the labor market

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Declining Housing Affordability

• Over the long run, housing prices and cost have risen faster than income for a larger swath of the population.

• In 1990, Portland’s median renter’s gross rent was less than 23% of household income.

• In 2010, Portland’s median renter’s gross rent was nearly 29% of household income.

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How to address affordability?

• Decrease numerator• Lower housing prices

• Increase supply (availability)• Decrease demand(desirability)

• Lower related costs (e.g., commute)

• Increase denominator• Raise income (increase productivity – particularly of

the traded sector)

• If not addressed, over the long-run, people (particularly lower income people) will move elsewhere.