The Diversity of Neighborhood Transitions

Sharon O'Donnell

No 265, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: Long-term observers of urban communities know that the housing quality distributions of communities and the changes of these distributions over time encompass not one but a variety of patterns. The equilibrium outcome derived from the housing market literature explains one pattern of change. Using Rust's stochastic equilibrium model of durable goods (Econometrica, 1985), we determine that the market can generate a set of patterns depending upon the degree of heterogeneity of homeowners, the underlying technology of the structures and the developer's demand for land. The paper presents a dynamic model of homeowner choice, given a market with new and existing structures of varying quality and a renewal process that describes the deterioration and replacement rates of these structures. There is a continuum of homeowners that differ by taste. Given the developer's price for new construction, the scrap price for sub-quality structures, and equilibrium bids of homeowner types in the market, heterogeneous homeowners sort along a holding distribution of homes. This paper describes the conditions for the existence and stability of stochastic equilibrium outcome. We find that long-run demand/bid function is the upper envelope of the bid functions of the individual types of homeowners in the market. The heterogeneous population (or diversity of preferences) leads to variations in the range of quality demanded for residential services and variations in optimal holding times for homes. Diversity also lead to utility gains for all homeowners.

Keywords: Housing markets; Stochastic dynamic programming (search for similar items in EconPapers)
JEL-codes: C61 C62 R21 R31 (search for similar items in EconPapers)
Date: 2001-04-01
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Working Paper: Diversity of Neighborhood Transition (2002)
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