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A Quick Review Of “Error Correction Models Of MSA Housing Supply, Elasticities: Implications For Price Recovery”

By Nadia Evangelou, Research Economist

William C. Wheaton, Serguei Chervachidze and Gleb Nechayev have published the findings of their research in a paper titled “Error Correction Models of MSA Housing Supply, Elasticities: Implications for Price Recovery[1].” A summary of their findings in a sample of house price and stock data from 68 US metropolitan areas is as follows:

  • It is estimated that the average market will reach 2007 price levels by 2022.
  • Home prices are forecast to rise generally over the next decade. Markets with significant barriers to new supply will experience faster growth. Examples of such markets include Boston, New York, Los Angeles and San Francisco.
  • Most of the markets are sensitive to a price increase in the short run (10 years) than in the long run. That is because, in the long run, new supply enters the market and relieves short run shortage.
  • Land supply, land use regulation, and population affect housing supply. All three factors have a negative effect on the housing supply. Of the three, regulatory differences across the MSAs show a higher impact on the housing supply. For example, Boston displays a lower housing supply than Washington DC due to their regulatory differences, and hence, home prices in Boston are likely to increase faster than in Washington DC.
  • Markets with a more inelastic supply exhibit both greater price increases over 2000-2007, and greater price declines from 2007 to 2012. The average increase in real prices over 2000-2007 was 48% and the decline from 2007-2012 was 30% – leaving the average market value in 2012 at about 4% above 2000 levels.
  • Home prices in Denver by 2022 are expected to be 58% higher than the prices in 2007, while in Miami it is expected to be only 5% higher. Full coverage of all metro markets is in the table below.

Finally, the authors claim that their forecasts suggest that housing will generally be a fine investment in most cases over the coming decade. They expect the annual long run cost of owning a home to again be as favorable as it was in the late 1970s, late 1990s and mid-2000s, spurring future home ownership, housing consumption and new housing construction.

Prices Declines and Forecast Recoveries

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