Research Description

Testing Glaeser's Model on House Price

Volatility in the U.S. Over the past decade, house prices in the U.S. have become increasingly volatile. Economist Edward Glaeser believes this larger variability is because of an increase in restricted cities, which are defined to be cities with high restrictions in housing supply. He argues that such cities exhibit higher house prices than unrestricted ones. Glaeser’s model is unique because it emphasizes the supply side of economics rather than the demand side to understand the housing market.

The purpose of this project is to test the validity of Glaeser’s model. We propose to do this by comparing two house-price measures: The Office of Federal Housing and Enterprise (OFHEO) and the American Chamber of Commerce Research Association (ACCRA). If Glaeser’s model is correct, we expect ACCRA to be higher than the OFHEO for an unrestricted city, and ACCRA to be comparable to the OFHEO for a restricted city. This is because The OFHEO uses the repeat sales of homes whereas ACCRA utilizes the repeat sales of homes plus new homes. In an unrestricted city, the construction of new homes, which are generally more expensive than those of repeat sales, is unlimited and hence, ACCRA should be higher than OFHEO. However in a restricted city, the construction of new homes is limited, and so the OFHEO and ACCRA data samples, which will both consist primarily of repeat sales, should be similar.

A primary complication will be categorizing a particular city as either restricted or unrestricted since no single exogenous factor determines which category it belongs to. Furthermore, a city may change from being unrestricted to restricted, or vice-versa, over time.

Testing Glaeser’s model is important because a confirmation of it would emphasize the need to better understand city regulations, their effects on the housing market, and the implications they have for urban planning.