Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm ECONOMICS OF THE METROPOLITAN AREA 212G, SPRING 2013

© 2012 The McGraw-Hill Companies. All Rights Reserved 2  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

© 2012 The McGraw-Hill Companies. All Rights Reserved 3  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 housing  The 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

© 2012 The McGraw-Hill Companies. All Rights Reserved 4 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 14-4

© 2012 The McGraw-Hill Companies. All Rights Reserved 5  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?

© 2012 The McGraw-Hill Companies. All Rights Reserved 6  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?

© 2012 The McGraw-Hill Companies. All Rights Reserved IS THERE A NEED FOR GOVERNMENT INVOLVEMENT?

© 2012 The McGraw-Hill Companies. All Rights Reserved 8  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?

© 2012 The McGraw-Hill Companies. All Rights Reserved 9  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 residents  What 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

© 2012 The McGraw-Hill Companies. All Rights Reserved 10 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 15-10

© 2012 The McGraw-Hill Companies. All Rights Reserved 11  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  These projects are estimated to have similar costs to public housing, Quigley (2000) estimates.62/dollar 3: LOW INCOME HOUSING TAX CREDIT

© 2012 The McGraw-Hill Companies. All Rights Reserved EFFECTS ON UNSUBSIDIZED DWELLINGS  How does the creation of subsidized dwellings affect the market for unsubsidized dwellings?  Does it affect Supply or Demand?

© 2012 The McGraw-Hill Companies. All Rights Reserved 13 Text EFFECTS ON UNSUBSIDIZED DWELLINGS

© 2012 The McGraw-Hill Companies. All Rights Reserved 14 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 $

© 2012 The McGraw-Hill Companies. All Rights Reserved 15 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?

© 2012 The McGraw-Hill Companies. All Rights Reserved 16 MARKET EFFECTS OF HOUSING VOUCHERS – NONSUBSIDIZED UNITS

© 2012 The McGraw-Hill Companies. All Rights Reserved 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? 14-17

© 2012 The McGraw-Hill Companies. All Rights Reserved 18 Step 1: High-Quality Submarket PRICE EFFECTS OF GROWTH CONTROLS

© 2012 The McGraw-Hill Companies. All Rights Reserved PRICE EFFECTS OF GROWTH CONTROLS Step 2: Supply Effects on Medium-Quality Submarket

© 2012 The McGraw-Hill Companies. All Rights Reserved PRICE EFFECTS OF GROWTH CONTROLS

© 2012 The McGraw-Hill Companies. All Rights Reserved 21  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