Professor: Keren Mertens HornOffice: Wheatley 5-78B

Office Hours: TR 2:30-4:00 pmE-mail: Keren.horn@umb.edu

ECONOMICS OF THE METROPOLITAN AREA

212G, SPRING 2013

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Last chance to lead class discussion (worth 5 points) Thursday Housing Discussion – Eddie, Eric, and Lester Next week Last Discussion Session on Private Government –

Erik, Roudy, Andrew

Thursday April 25 th – Draft 2 Assn 2 and Outline for Final Paper (please let me know ahead of time if you will have trouble completing these assignments on time)

Final Presentations (everyone is required to attend their classmates’ presentations, or will be penalized a grade on their own presentation) Gun Control – May 7 th Stop and Frisk – May 9 th Schools – May 14 th

CLASS UPDATES

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Value of U.S. residential real estate in 2003 was $13.4 trillion, out of a total net stock of wealth of $34.8 trillion. In 2003 American houses were worth about the same as the

total combined value of the 13 largest stock markets outside the U.S.

For most Americans wealth is housingThe federal government also spends a large amount

on housing The federal government sacrifices about $66 billion in tax

revenue each year subsidizing mortgage interest The federal government also spends about $30 billion each

year assisting low-income households meet their housing needs

What makes housing different from other commodities?

INTRODUCTION TO HOUSING

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WHY IS HOUSING DIFFERENT?

Serves many purposes : shelter, protection, privacy, provides rights to public services like

schools

Heterogeneous : dwellings differ in size, age, style, features, location

Durable: Deterioration rate depends on maintenance and repair decisions

Fixed in Space: Site characteristics part of value of housing (accessibility to jobs,

local public services, environmental quality)

Costly Moving : Adjustment when gap between ideal and actual large

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Arguments about efficiency:

Since housing is fixed in space, generates externalities If your house is falling down it affects your neighbors’ property

values If you paint your home, your investment will benefit your

neighbor

Since housing is durable, maintenance decisions are key determinants of long term value People (particularly renters) may not have appropriate incentives

to maintain the property

Since building housing involves large capital outlays, attaining appropriate financing can be challenging, leading to a lower than optimal amount of construction

IS THERE A NEED FOR GOVERNMENT INVOLVEMENT?

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Arguments about equity:

Housing is a “merit good” Good society believes an individual should have on the basis of

need rather than ability to pay

Can be viewed as one method of addressing poverty In-kind transfers are often more politically popular than cash

transfers Alleviating some of the effects of poverty can have efficiency

implications for society as well – if low-income households are well housed, they may be less likely to commit crimes or become involved in the black market

IS THERE A NEED FOR GOVERNMENT INVOLVEMENT?

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IS THERE A NEED FOR GOVERNMENT INVOLVEMENT?

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Federal Outlays: Subsidize homeownership - $66 billion per year

Mortgage interest deduction Allows taxpayers who own their homes to reduce their taxable income by the

amount of interest paid on the loan Mostly benefits middle and high income households

Assisting low-income households - $30 billion per year Providing public housing Subsidizing privately produced housing Providing vouchers for households to use towards rent

Local regulation: Zoning codes – one way to minimize negative externalities

associated with developments Building codes – one way to ensure adequacy of housing

HOW IS THE GOVERNMENT INVOLVED IN THE HOUSING

MARKET?

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When housing conditions are very bad, regulation appears to be the correct response – make these conditions illegal

Example/Newark, New Jersey Every room (except kitchen) in a home must be at least 7 feet in

every direction Every unit must contain one room of 150 square feet or more Every unit must have one toilet, one shower for every 6-8

residentsWhat are the effects of building codes?

If enforced can improve the quality of housing in the market overall

May not affect rich people, who wouldn’t buy these substandard homes to begin with

May affect low-income households because it increases the quality (and in this way also the price) of the most affordable housing in a market

1: BUILDING CODES

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2: PUBLIC HOUSING

Another potential reaction to concern over poor housing conditions for poor households is to build housing for these residents – Public Housing

About 1.2 million households (about 1% of housing stock in US) Budgetary cost about $7 billion Managed by local housing authorities Rent no greater than 30% of recipient income

Economists estimate that these projects cost much more to be built than they are worth the tenants Estimates of value of public housing range between

.24/dollar to .70/dollar Tenants would be better off if the government handed them

$1 rather than gave it to them in the form of public housing

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Tax Reform Act of 1986 instituted a program of tax credits for investment in affordable housing for low-income households

Developers receive a tax credit in exchange for setting aside a number of units in their project as affordable. This provides an incentive for the production of affordable housing.

2.2 million affordable units have been produced under this program since 1987.

These projects are estimated to have similar costs to public housing, Quigley (2000) estimates .62/dollar

3: LOW INCOME HOUSING TAX CREDIT

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EFFECTS ON UNSUBSIDIZED DWELLINGS

How does the creation of subsidized dwellings affect the market for unsubsidized dwellings? Does it affect Supply or Demand?

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TextTextText

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EFFECTS ON UNSUBSIDIZED DWELLINGS

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4: HOUSING VOUCHERS

Instead of producing housing, housing vouchers allow low-income households to find housing in the private market.

This provides low-income households with more choice on where to live

About 2.2 million households receive housing vouchers, at a cost of approximately $19 billion per year.

Economists estimate that recipients value $1 of a housing voucher at about $1.

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MARKET EFFECTS OF HOUSING VOUCHERS – NONSUBSIDIZED

UNITS How does the

provision of housing vouchers affect the market for moderate quality housing (i.e. housing that can be rented by households with vouchers)? Does it affect supply

or demand?

How does the provision of housing vouchers affect the market for medium quality housing (i.e. housing just slightly more expensive than what can be rented by households with vouchers)? Does it affect supply

or demand?

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MARKET EFFECTS OF HOUSING VOUCHERS – NONSUBSIDIZED

UNITS

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5. GROWTH CONTROLS

Another way that governments are involved in housing markets is by regulating the number of buildings that can be built. How does a ban on new housing (high quality) affect

housing prices?

Will these bans affect supply or demand?

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Step 1: High-Quality Submarket

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PRICE EFFECTS OF GROWTH CONTROLS

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PRICE EFFECTS OF GROWTH CONTROLS

Step 2: Supply Effects on Medium-Quality Submarket

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PRICE EFFECTS OF GROWTH CONTROLS

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Housing Affordability in MA : Why does Ed Glaeser believe that young workers cannot afford homes in MA? Cite evidence from the article.

Rethinging Federal Housing Policy : What changes does Ed Glaeser propose to our federal housing policy? Why will these changes be more “sensible”? Cite evidence presented by Glaeser in the article.

Boston’s Housing Policy : Do you believe that Mayor Menino’s plan will increase housing affordability in MA? Why or why not? Cite specific policies he proposes from the article.

DISCUSSION: RETHINKING HOUSING POLICY