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B. Housing
1. Housing as a unique
commodity
a. Heterogeneity
- Each dwelling offers a
different bundle of housing services.
- Dwelling
characteristics - size, layout, quality,
interior design, structural integrity
b. Immobility
- Location is part of
housing bundle
- Site characteristics -
accessibility, local public services and
taxes, environmental quality, appearance
of neighborhoods
- Neighborhood effect
- exterior appearance of one house cause
spillover benefits or costs to
surrounding houses
Housing Market
Considerations
(1) Hedonic
approach
- Estimate dollar values
of different housing attributes
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- Use regression to
determine value of characteristics
Ex. -
| |
Interior Quality |
Age |
# of Rooms |
Number of Baths |
Exterior Quality of
Adjacent Buildings |
Exterior Quality of
Dwellings on Block |
Miles from CBD |
| Rental |
2.1% |
-0.5% |
36.8% |
14.8% |
3.0% |
6.0% |
-0.5% |
| Owner |
5.6% |
-0.7% |
10.0% |
5.3% |
5.3% |
2.9% |
-2.4% |
(2) Segmented but related
markets
- Differences in size,
location, and quality lead to housing
submarkets
- Imperfect substitutes
- movement between submarkets in response
to price changes
c. Durability
Housing has longer life
than most commodities - deteriorates over
time, but at slow rate
(1) Deterioration,
maintenance, and abandonment
Rate of
deterioration can be controlled - money
can be spent on repair and maintenance
(a) Optimum
quantity of housing services
- Landlord will
spend money to achieve maximum
profit
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- More costly to
maintain as housing ages
- Less demand as
housing ages
(b) Retirement
decision
- Rental housing
may become unprofitable -
decrease in average income,
decrease in population, increase
in competing supply, increase in
costs
- Conversion:
convert to nonresidential use
- Boarding up:
take off market temporarily
- Abandonment:
alternative uses not profitable
enough to cover conversion costs
(c) Abandonment and
public policy
- Property tax
increases frequency of
abandonment - can turn profits
into losses
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- Extreme
neighborhood externality -
vandals, graffiti, transients,
drug dealers
(2) Elasticity
(a) Supply
elasticity
- Can't alter
supply quickly
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- Response to
price increases:
- Build new
housing
- Maintain used
dwellings
- Remodel used
dwellings
(3) Filtering model
- Slow deterioration
=> large supply of used housing
- New construction =
2% - 3% of total housing stock =>
70% - 80% of households > 10
years old
- Rich occupy new
housing, leave older for poor
- Over time, a
dwelling will experience a decrease
in housing services, decrease in
occupant income
- Policies that
encourage new housing help both rich
and poor
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d. High cost of housing
Large portion of
households are renters, homeownership used to
accumulate wealth
(1) Cost of renting
Landlord - capital,
depreciation, maintenance
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(2) Cost of home
ownership
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(3) Renting vs. owning
- Renter
externality - renter has no
long-term stake in building, little
incentive for maintenance =>
maintenance cost for rental housing
is higher
- Some homeowners
work around house as a hobby =>
maintenance is lower for
owner-occupied housing
- Rental housing
riskier => higher interest rate
for rental housing
- Low income, high
mobility, distaste for work on home
increases chance of renting
(4) Taxes and housing
- Rapid depreciation
- reduces taxes on rental property,
should reduce rent
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- Mortgage deduction
- mortgage interest can be deducted
from taxable income, reduces cost of
home ownership
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Inefficient because
too much housing is consumed, done to
deal with renter externality
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- Imputed rental
income not taxed, reduces cost of
home ownership
e. High moving costs
- Cost includes cost of
leaving old neighborhood in addition to
cost of moving items
- Small change in income
or price is unlikely to change housing
consumption
- Large change in
housing consumption when move is made
2. Homelessness
Someone who sleeps outside, in places not
intended for sleeping, or in housing shelters,
about 250,000 - 350,000 a night
a. Characteristics
- Single men (73%)
- Single women (9%)
- Women with children (8%)
- Married couples with children (1%)
- Married couples without children (2%)
- Adults traveling together (7%)
b. Problems
- High school dropouts (49%)
- Time in mental hospital (19%)
- Treated for chemical dependency (33%)
- Spent time in jail (53%)
- Spent time in prison (24%)
- Attempted suicide (21%)
c. Factors affecting homelessness
- Rent for low-quality housing (elasticity
= 1.25)
- Employment growth rate (-0.15)
- Size of welfare payment (-1.54)
- Institutionalization of the mentally ill
(-0.32)
- City size (0.22)
3. Policies
Original goal of Federal housing policy -
provide "a decent home and a suitable environment for every
U.S. family."
a. Housing conditions
- Inadequate - incomplete plumbing
or kitchen, structural problems, unsafe heating or electrical
systems
- Crowded - more than one person per
room
- Cost burdened - more than 30% of
income spent on housing
| |
All |
Poor |
Metro |
Black |
| Inadequate |
7.9% |
17.4% |
7.3% |
17.4% |
| Crowded |
2.7% |
7.5% |
2.9% |
5.2% |
| Cost-burdened |
28.0% |
62.1% |
29.6% |
38.0% |
| Total |
38.7% |
87.0% |
39.8% |
60.6% |
b. Neighborhood conditions
- Neighborhood conditions affect
satisfaction - junk, abandoned buildings, crime, rundown
buildings, noise
- Greatest dissatisfaction among people
living in multifamily dwellings in central cities
- Blacks more dissatisfied than whites, low
income more dissatisfied than high income
c. Supply-side policies
(1) Public housing
- Built and managed by local government
- Federal involvement - capital
subsidies, operating subsidies, tenant selection (< 80%
of median income in area)
(a) Efficiency
- Benefits to tenants = $0.80 for every
dollar spent
- More expensive than private housing -
private sector can build new housing more efficiently than
public sector, plentiful supply of used low-quality
housing.
(b) Living conditions
- Lower income => more crime
- Units abandoned, taken over by drug
abusers and gangs
- Layout (high-rise buildings) lead to
sociological problems - high density, difficult to
supervise
- Low-rise buildings better, more
costly
(c) Market effects
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(2) Subsidies for private housing
construction
- Section 236, 1968 National Housing Act
- Low interest (3%) mortgages for
multifamily housing - HUD guidelines for rents and income of
renters
New construction now de-emphasized - too
costly.
d. Demand-side policies
Give subsidies to poor, let them choose
housing
(1) Section 8, Housing and Community
Development Act of 1974
- Must have income < 80% of area
median.
- Bulk to very poor (< 50% of area
median).
- Dwelling must meet minimum standards,
cannot spend more than fair market rent.
- Government pays difference between
actual rent and 30% of eligible household's income.
- Subsidy = Actual rent - (0.30 * Income)
Ex. -
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- Few households moved to dwellings
rented for fair market value => moving costs high
(2) Housing vouchers
- Bulk goes to very poor, dwelling must
meet minimum standard
- Face value = Fair market rent - 0.30 *
Income
Ex. -
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- Recipient can spend more than fair
market rent on housing.
(3) Market effect
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- Price driven up for nonrecipients.
- Voucher equivalent to income, more
utility
- Allows tenants to occupy inexpensive used
housing => more housing per budget $
- Taxpayers seem to support public housing
rather than voucher, care more about housing consumption than
utility
e. Community development and urban
renewal
- Housing only a small part of environment.
- Is housing the problem, or is it low
income?
(1) Urban renewal
- Local governments given power to demolish
and rebuild part of cities
- "Undesirable" uses (low-income
housing, small businesses) eliminated, higher income housing,
government buildings, and commercial establishments built.
- Effects - 2 million poor people
displaced; new housing, public and commercial facilities
built; tax revenue increased
(2) Recent approaches
- Community Development Block Grants (CDBG)
- large cities with old housing, high poverty, slow growth
- Urban Development Action Grants (UDAG) -
leverage private investment.
(3) Projects
- Improved housing - renovate buildings,
enforce codes, build low-income housing
- Improved infrastructure - improve
streets, roads, water, sewage
- Job development - encourage economic
development and job creation
- Public services - public services for
elderly, homeless, children
f. Rent control
(1) Market impacts
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- Less maintenance, more deterioration
(2) Controlling supply response
- Restrictions on conversions
- Subsidies for new construction
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