Essays on Housing Markets

Housing assets have long been the most important assets in household portfolios. Therefore, understanding the long-run trends of the key indicators in the housing market is important for understanding household housing tenure choice and asset allocation, evaluating household welfare, and analyzing financial stability. My thesis consists of three chapters accounting for the changes in homeownership rates, cross-city distribution of prices and rents, and aggregate housing prices in the United States for the past several decades. Chapter 2 focuses on the decline in the homeownership rate among young households since 1980. I find that while some of the college graduates merely postpone home purchases, a considerable fraction of non-college graduates have become long-term renters. I show the diverging ownership decisions between college and non-college graduates is driven by changes in the income distribution, due to an increasing population share of college graduates and unbalanced income growth among young and middle-aged college graduates. My findings suggest that low-income, non-college graduates are facing an affordability problem. Chapter 3 focuses on cross-city variation in the two shelter costs: prices and rents. Since owning and renting are the most prevalent options to obtain housing services, understanding the joint distribution of prices and rents across cities has important implications on the ownership decisions and life quality in each city. I first document three stylized facts about the distributions of prices and rents across cities in the U.S.: (i) prices are more dispersed compared to rents across cities; (ii) the dispersion of house prices has increased more than the dispersion of rents from 1980 to 2010; (iii) prices and rents are highly correlated in both levels and growth rates. As most owners live in detached houses while most renters live in apartments, this chapter examines the implication of the difference in land use between houses and apartments on these observations. I develop a city-level housing tenure choice model where owner-occupied houses take more land to build compared to rental apartments. I calibrate the model to house prices, rents, and the fraction of households living in houses for each of the largest 181 cities in the U.S. in 1980. Feeding in the model population, income, down payment requirement, and residential land supply in 2010, I show the model can account for 82% of the large increase in house price dispersion and 56% of the increase in rent dispersion from 1980 to 2010. Chapter 4, which is co-authored with Yifan Gong, investigates the contribution of four demographic-related factors i.e. changing fertility, rising life expectancy, urbanization, and international immigration, on the growth of the aggregate housing price since 1970. Conceptually, the total housing demand is determined by the age profile of housing demand aggregated over the age distribution of the population. Among these four factors, declining fertility, rising life expectancy, and international immigration affect the age distribution of the population. In addition, rising life expectancy changes the age profile of housing demand. Specifically, it leads to an increase in the housing demand for senior households. Urbanization that moves people from rural areas with high supply elasticity to urban areas with low supply elasticity further increases house prices. To quantitatively evaluate the importance of these four factors and to make projections on future house prices, we develop a general equilibrium model and find these four factors can account for 41% of the observed housing price growth from 1970 to 2010. Applying the projected changes in these four factors, we predict housing prices will keep growing by about 5% to 25% from 2010 to 2050. The growth rates vary with urbanization rates and the levels of immigration