On Local Housing Supply Elasticity

Housing markets have been established as fundamental to our understanding of business cycles, labor mobility, household wealth accumulation, portfolio allocation, and urban dynamics. Housing supply is a key element to explain housing price levels and fluctuations and recent literature argues about the extent to which residential land regulations drive housing price changes. However, research has failed to treat regulation as endogenous to the housing market equilibrium, and to local attributes that have an independent impact on housing supply. In this paper I use new US data about the local extent of restrictive housing development regulations and a wealth of institutional and demographic variables for the metropolitan areas of the United States. I give empirical content to the concept o land availability by processing satellite-generated data on elevation and presence of water bodies to precisely estimate the amount of developable land in each metro area . I demonstrate that development is effectively curtailed by the presence of slopes above 15% and that most areas that are widely regarded as supply-inelastic are, in fact, severely land-constrained by their topography. Furthermore, the extent of topographical constraints correlates positively ands strongly with regulatory barriers to development. I estimate a system of equations where housing prices, construction, and regulations are all determined endogenously. Housing supply elasticities can be wellcharacterized as functions of both physical and regulatory constraints, which in turn are endogenous to prices and past growth. The results provide operational estimates of local supply elasticities in all major US metropolitan areas.