Supply Constraints Are Not Valid Instrumental Variables for Home Prices Because They Are Correlated With Many Demand Factors

Thomas Davidoff ()

Critical Finance Review, 2016, vol. 5, issue 2, 177-206

Abstract: Economists sometimes assume that strictly regulated housing markets near mountains and oceans are expensive because they are costly places to build, not because they are nice places with productive firms and workers. U.S. data show this convenient assumption to be false. Housing supply has grown more in supply-constrained markets than elsewhere over recent decades, indicating constraints are correlated with demand growth. Supply constraints are highly correlated with productivity proxies such as historical education levels, immigration, and national employment growth in locally prevalent industries. The correlation between constraints and productivity growth invalidates common uses of constraints as part of instrumental variables for home prices. The relationship between supply constraints and price volatility is much weaker after accounting for observable demand factors.

Keywords: Housing Demand; Financing Policy; Wage level and structure (search for similar items in EconPapers)
JEL-codes: G32 J31 R21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (79)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000037

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