Inequality and Housing
Document Type
Event
Faculty Mentor
Michael Cauvel
Abstract
Over the past decade, housing prices in the United States have risen substantially faster than inflation, while income inequality has continued to increase. This paper examines whether changes in income distribution are associated with changes in housing prices. We hypothesize that declining labor share shifts housing demand toward higher-end properties, encouraging developers to allocate residential investment toward luxury housing rather than entry-level homes. This change in the composition of the housing supply may increase the median price of housing by raising the share of high-priced homes and exacerbating shortages in the affordable segment of the market. To evaluate this mechanism, we are developing a model that regresses the natural log of real median housing prices on the labor share of GDP using U.S. macroeconomic data. As an intermediate step, we constructed a second model that shows a relationship between labor share and fixed residential investment. Currently, we are creating a model to examine the relationship between residential investment and real median housing prices, if any exists. This model will include two specifications: one that includes the average 30-year fixed mortgage rate in the real median housing price, and one that does not. This is included because home buyers don’t just pay the selling price when purchasing a house; they also pay the real interest rate on their loan. The reason this is not the only specification is that interest rates are determined heavily by monetary policy, which can also affect the labor share of GDP. This double effect means that this specification may show a relationship when none exists when we construct the final model that regresses real housing prices on the labor share. Preliminary results indicate a significant relationship between labor share and residential investment, but it is sensitive to variable specification. Ongoing work examines whether residential investment is associated with increases in the real median housing price.
Inequality and Housing
Over the past decade, housing prices in the United States have risen substantially faster than inflation, while income inequality has continued to increase. This paper examines whether changes in income distribution are associated with changes in housing prices. We hypothesize that declining labor share shifts housing demand toward higher-end properties, encouraging developers to allocate residential investment toward luxury housing rather than entry-level homes. This change in the composition of the housing supply may increase the median price of housing by raising the share of high-priced homes and exacerbating shortages in the affordable segment of the market. To evaluate this mechanism, we are developing a model that regresses the natural log of real median housing prices on the labor share of GDP using U.S. macroeconomic data. As an intermediate step, we constructed a second model that shows a relationship between labor share and fixed residential investment. Currently, we are creating a model to examine the relationship between residential investment and real median housing prices, if any exists. This model will include two specifications: one that includes the average 30-year fixed mortgage rate in the real median housing price, and one that does not. This is included because home buyers don’t just pay the selling price when purchasing a house; they also pay the real interest rate on their loan. The reason this is not the only specification is that interest rates are determined heavily by monetary policy, which can also affect the labor share of GDP. This double effect means that this specification may show a relationship when none exists when we construct the final model that regresses real housing prices on the labor share. Preliminary results indicate a significant relationship between labor share and residential investment, but it is sensitive to variable specification. Ongoing work examines whether residential investment is associated with increases in the real median housing price.
