Incorporating the Number of Existing Home Sales into a Structural Model of the Market for Owner-Occupied Housing

Abstract

The principal purpose of this paper is to develop and estimate a structural model of the housing market. The structural model presented is like many previously presented models of the housing market. It contains a demand equation, a supply equation, and an equation to explain the number of homeowner households. Its principal distinguishing feature is the incorporation of the rate of housing sales. This is done by adding a fourth equation to the model that explains the rate of housing sales (or turnover rate) and by including the turnover rate in the supply equation. Housing sales are measured using the National Association of Realtors Existing Homes Sales Survey; the rate of sales is found to be negatively related to the level of housing prices. This particular result is in disagreement with several recent papers that find a positive relationship between housing sales and housing prices. As we argue in the paper, the result is consistent with a lessening in the importance of downpayment and liquidity constraints in the housing decisions of households in the late 1980s and 1990s. Other important results include: (1) the number of home owners is determined in large part by the size of the population of the metropolitan area; (2) the price elasticity of supply is quite large; (3) the demand for housing per household performs reasonably well; and (4) the reduced form equations seem reasonable.