An Examination of Various Elasticities for Residential Sites

Abstract

Between 1963 and 1974, the median price of single-family homes approximately doubled, from $18,000 in 1963 to $35,800 in 1974 [Sumichrast and Frankle 1970; New York Times 1974]. This rise in housing prices was much larger than the rise in consumer prices, and can be only partly explained by an altered median housing bundle during the period.1 Although the number of consumer durables included in the price of homes increased markedly during the period, the average interior and exterior living space has declined, particularly since 1969 [U.S. Bureau of the Census 1975; U.S. Department of Housing and Urban Development 1965 and various volumes]. Given the historic American attachment to single-family housing, an investigation of the reasons for the rapid and persistent rise in single-family housing prices would seem worthwhile. During the sixties, the cost of sites was by far the most rapidly increasing portion of housing costs. While the Boeckh index of residential construction costs increased by 4.6 percent per annum, the average price of building sites increased by 12 percent per annum [Sumichrast and Frankle 1970; U.S. Department of Housing and Urban Development, various volumes]. From 1969 to 1974, increased mortgage costs were the most rapidly rising component of single-family housing costs, but land was the second most rapidly rising component [New York Times 1974]. As a first step toward understanding the rapid and persistent rise in singlefamily housing prices, this paper will examine various elasticities related to the price of single-family residential sites. The following section reviews previous work on elasticities for residential sites. Section three extends this previous work by estimating the price elasticity of demand for housing. Section four examines the appropriateness of the constant elasticity assumption which has underlain most previous work in the area. Section five contains a summary of the paper and makes various suggestions for public policy affecting single-family residential site prices.