<p>The idea is that all else equal, areas with inelastic housing supply (e.g., areas that are surrounded by water, so you can't just build some more houses "over that way") will see greater house price growth, which increases household wealth, and that these differences in supply elasticity are exogenous and uncorrelated with other things that matter. In <a href="http://mitcre.mit.edu/wp-content/uploads/2014/03/The-Quarterly-Journal-of-Economics-2010-Saiz-1253-96.pdf" rel="nofollow">Saiz (2010)</a>, he uses terrain and water data to determine the degree to which the housing supply in different metropolitan areas is constrained by geographic features.</p>

<p>It's a method that really only works (to the extent that it does) when house prices are rising, which would induce housing construction. If house prices are falling, supply elasticity tends to be pretty low— we don't tend to bulldoze homes at a particularly high rate.</p>

<p>With respect to the degree to which house price changes are anticipated, I think the best work on expectations is that done by Case and Shiller over the years, most recently <a href="http://www.brookings.edu/~/media/Projects/BPEA/Fall-2012/2012b_Case.pdf?_lang=en" rel="nofollow">Case, Shiller, and Thompson (2012)</a>.</p>

CC BY-SA 3.0
2015-04-29T18:20:19.580Z
OK I see how that's exogenous. But this is not an argument for them being *unanticipated*, right?
FooBar
CC BY-SA 3.0
2015-04-29T18:25:29.187Z
It's certainly not a particularly good reason to believe that the house price movements are unanticipated— I'm sure people are usually aware whether they are or are not on a peninsula, for example. It might be interesting to look into the surveys behind the Case and Thompson 2012 BPEA paper (and the earlier one w/ Shiller) to see whether people in constrained areas anticipated more house price growth.
dismalscience
CC BY-SA 3.0
2015-04-29T18:19:00.223Z
2015-04-29T18:31:06.740Z
2015-04-29T18:31:06.740Z
dismalscience
<p><a href="http://scholar.princeton.edu/sites/default/files/SSRN-id2412263_0.pdf" rel="nofollow">Mian and Sufi (2014)</a> say</p>

<blockquote>
  <p>We use individual and zip code level data, and exploit cross-sectional variation in house price growth to estimate the impact of rising home values on borrowing and spending. We use the Saiz (2010) housing supply elasticity of a CBSA as an instrument for house price growth, and focus on the heterogeneous effects of house price gains on borrowing and spending.</p>
</blockquote>

<p>And, later</p>

<blockquote>
  <p>The question we seek to answer is: Are housing wealth shocks also shocks to cash on hand? We answer this question by empirically estimating how changes in housing wealth affect
  household borrowing and spending decisions.</p>
</blockquote>

<p>I miss the step on how to get housing wealth <em>shocks</em> as opposed to general equilibrium changes in housing prices. In general, changes in housing wealth are not necessarily exogenous and unanticipated. How does the housing elasticity help to extrapolate exogenous price movements in the housing sector?</p>

<econometrics><academic-graduate><elasticity><empirical-methods>
Housing Supply Elasticity: Proxy for Exogenous House Price Movements
FooBar
# Housing Supply Elasticity: Proxy for Exogenous House Price Movements

(Asked by: username_0 on 2015-04-29)

[Mian and Sufi (2014)](http://scholar.princeton.edu/sites/default/files/SSRN-id2412263_0.pdf) say

> We use individual and zip code level data, and exploit cross-sectional variation in house price growth to estimate the impact of rising home values on borrowing and spending. We use the Saiz (2010) housing supply elasticity of a CBSA as an instrument for house price growth, and focus on the heterogeneous effects of house price gains on borrowing and spending.

And, later

> The question we seek to answer is: Are housing wealth shocks also shocks to cash on hand? We answer this question by empirically estimating how changes in housing wealth affect
> household borrowing and spending decisions.

I miss the step on how to get housing wealth *shocks* as opposed to general equilibrium changes in housing prices. In general, changes in housing wealth are not necessarily exogenous and unanticipated. How does the housing elasticity help to extrapolate exogenous price movements in the housing sector?

**Tags:** econometrics, academic-graduate, elasticity, empirical-methods

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## 1 answers

### Answer by username_1 on 2015-04-29. Score: 4 | Accepted answer

The idea is that all else equal, areas with inelastic housing supply (e.g., areas that are surrounded by water, so you can't just build some more houses "over that way") will see greater house price growth, which increases household wealth, and that these differences in supply elasticity are exogenous and uncorrelated with other things that matter. In [Saiz (2010)](http://mitcre.mit.edu/wp-content/uploads/2014/03/The-Quarterly-Journal-of-Economics-2010-Saiz-1253-96.pdf), he uses terrain and water data to determine the degree to which the housing supply in different metropolitan areas is constrained by geographic features.

It's a method that really only works (to the extent that it does) when house prices are rising, which would induce housing construction. If house prices are falling, supply elasticity tends to be pretty low— we don't tend to bulldoze homes at a particularly high rate.

With respect to the degree to which house price changes are anticipated, I think the best work on expectations is that done by Case and Shiller over the years, most recently [Case, Shiller, and Thompson (2012)](http://www.brookings.edu/~/media/Projects/BPEA/Fall-2012/2012b_Case.pdf?_lang=en).

> **Comments:**
> **username_0**: OK I see how that's exogenous. But this is not an argument for them being *unanticipated*, right?  
> **username_1**: It's certainly not a particularly good reason to believe that the house price movements are unanticipated— I'm sure people are usually aware whether they are or are not on a peninsula, for example. It might be interesting to look into the surveys behind the Case and Thompson 2012 BPEA paper (and the earlier one w/ Shiller) to see whether people in constrained areas anticipated more house price growth.  

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