Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market

Research output: Working paper

Abstract

This paper incorporates speculation into the standard supply-and-demand framework used to analyze housing booms and busts. Speculation reverses the common intuition that elastic housing supply attenuates housing booms. Housing market frictions make land a more attractive speculative investment than housing. As a result, undeveloped land both facilitates construction and intensifies the speculation that causes booms and busts in house prices. This insight explains the frequent housing booms and busts that coincide with high construction activity (e.g. Las Vegas, 2000-2010). These episodes are most likely to occur when a housing market nears but has not yet reached a long-run development constraint. Consistent with the recent U.S. housing experience, the model predicts higher price volatility in neighborhoods where housing is more easily rented. Land is an asset whose price volatility can increase with its float.
Original languageEnglish (US)
Number of pages51
StatePublished - Nov 2013

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