Staff Working Papers

Working Paper 03-2: Drawing Inferences about Housing Supply Elasticity from House Price Responses to Income Shocks

Author(s): ​Michelle Harter-Dreiman

Abstract: The purpose of this paper is to provide information about the price elasticity of the housing supply by examining the relationship between the average price of single-family housing and the amount of personal income. A two-equation vector error correction system is estimated using a panel data set consisting of 76 MSAs from 1980 to 1998. The results suggest an elastic long-run supply function but a relatively slow pace of adjustment to long-run equilibrium. Hence a major demand shock can be expected to impact housing prices for several years following the shock. Differences in the responsiveness among subgroups of MSAs are examined and found to be generally minor.