DISEQUILIBRIUM IN HOUSING MODELS

The housing and mortgage markets have long been considered to be markets that may not always be in equilibrium, and many econometric models of the housing and mortgage markets have tried in one way or another to account for disequilibrium effects. In this paper a critique of previous models of the housing and mortgage markets is made. The main argument of the paper is that disequilibrium effects have not been accounted for in an adequate way in most models. A related argument of the paper is that many models have not captured in an adequate way the interaction between the housing and mortgage markets. In Section II a general model of the housing and mortgage markets, based on the model in [5, Chapter 8], is outlined, and then in Section III previous models of the housing and mortgage markets are analyzed within the framework of the model outlined in Section II. Section IV concludes with suggestions for future research. It should be noted that while representative models were chosen for review in Section III, the list of models reviewed is by no means exhaustive. This paper is not meant to be a survey of the literature on housing and mortgage models, but is merely meant to be a critique of models with respect to the specification of disequilibrium effects and with respect to the specification of the interaction between the housing and mortgage markets.' Also, the critical tone of the paper regarding these two issues should not be interpreted as a degradation of the significant progress that has been made in the past two decades in understanding the workings of the housing and mortgage markets. II. AN OUTLINE OF A MODEL OF THE HOUSING AND MORTGAGE MARKETS There are three basic groups of participants in the housing and mortgage markets: people who demand housing services and the funds to finance housing purchases, people who build new houses and remodel existing houses, and people who supply the funds to finance housing purchases. The specification of the factors that influence the demand for housing services is fairly straightforward. The theory of consumer behavior indicates that the demand for a good or service should be a function of income and of the price of the good or service relative to all other prices. Per capita demand for housing services should thus be a function of per capita income and of the price of housing services relative to other prices. Demographic factors, such as the age * Assistant Professor of Economics, Princeton University. I am indebted to Paul N. Courant for a survey of previous housing and mortgage models and for many helpful suggestions and comments throughout the course of this study.