Housing Dynamics: Theory Behind Empirics

Abstract: We construct a two-sector optimal growth model of housing where housing is produced by both land and housing structure/household durables. We explicitly model locational choice. Housing services derive positive utility but are decayed away from the city center. Our model enables a full characterization of the dynamic paths of housing stocks as well as housing and land prices. The model is particularly designed to be calibrated to fit some important stylized facts, including faster growth of housing structure/household durables than the housing stock, faster growth of land prices than housing prices, and a locationally steeper land rent gradient than the housing price gradient. The calibrated model is then used to quantitatively assess the long-run and short-run consequences of changes in preferences and technologies