Housing Investment in the United States

TLDR

A supply‑determined model of housing investment, estimated from 1963‑83 quarterly data, is built on dynamic marginal cost pricing and allows short‑ and long‑run supply elasticities to differ. Estimated short‑run elasticity is 1.0 and long‑run elasticity 3.0, with most long‑run response occurring within a year; rapid adjustment and a large long‑run elasticity explain housing investment volatility, and the data reveal anomalies in expected present value theory for housing capital.

Abstract

A supply-determined model of housing investment is estimated from quarterly data over the 1963-83 period. The model is built on dynamic marginal cost pricing considerations and allows short- and long-run supply elasticities to differ. These are estimated as 1.0 and 3.0, respectively, but most of the long-run response occurs within 1 year. Rapid adjustment speed and the sizable long-run elasticity of supply are important factors in understanding the volatility of housing investment. The data also suggest some anomalies in the expected present value theory of asset pricing for housing capital.