Forty Years of Studying Housing and Urban Development -- The IMF's Hites Ahir Interviews Malpezzi

The IMF's Hites Ahir and Prakash Loungani have created a tremendous online resource, Global Housing Watch.  It's become one of my go-to sources for information about housing prices around the world.

Prakash, with some help from Hites, also has a terrific blog, The Unassuming Economist, that I've cited in my sidebar list of recommendations since we re-started REUD Viewpoint.

One of the nice features of their blog is that Prakash and Hites often interview economists and others of interest to readers of REUD Viewpoint.  One of my favorite recent interviews is one they did of Kecia Rust of the Centre for Affordable Housing Finance in Africa.  It's got some really interesting data on housing costs in Africa, that will inform my own current research with my friends Moussa Diop and Jay Sa-Aadu.

So I was pleased when they invited me to be interviewed.  Hites sent me a dozen or so questions, and asked me to respond via email.

Which I did, recently.  But those who know me are already chuckling.  I've long the famous aphorism "I have written a long letter, since I didn't have time to write a short one."  (In fact until today I sloppily attributed this quote to George Bernard Shaw, although the Internet reminds us the source is much in dispute.)

So Hites and I have edited the first version down.  But on the theory that if you take each question as a separate post, and the further theory that some of the things I've edited out, including references, are of some use, we decided I would publish the long version here, in sections.

So, here we go.  This first REUD Viewpoint version incorporates Hite's original working title, which I found amusing.

(And in case you can't read my intentions well in print, my umbrage is feigned!)

An Economist’s Lifelong Study of Housing MarketsHites Ahir interview of Steve Malpezzi, March 3, 2017 (via email)

One initial comment at your proposed title for this interview – “lifelong” sounds like I’m nearing my end.  I’ve only been doing this for 40 years (started in 1977!)  Remember, to Boomers, “64 is the new 44.”  Even in an earlier era, after age 60 one of my great heroes, Benjamin Franklin: served as ambassador to England and to France; created the first reliable chart of the Gulf Stream; invented the Franklin Stove and the glass harmonium; contributed to and signed the Declaration of Independence; became the first Postmaster General; became President of the Pennsylvania Abolition Society; served at the Constitutional Convention; and wrote his Autobiography.

I don’t expect any of my work to approach the smallest of these accomplishments, but I hope to at least make some additional contributions to the study of cities and real estate markets over the next few decades.

1.      What got you interested in housing markets?

Serendipity. In the 1970s I was studying politics and economics while majoring in international affairs at The George Washington University. I needed a part-time job, and one of my roommates who worked for the Urban Institute’s Ray Struyk helped me get an interview, and I started working as a research assistant on housing market behavior, initially for Ray and later for Jim Follain. I had an empirical bent, and I enjoyed our work on the measurement and interpretation of house prices. The Institute was filled with other great colleagues, so I learned a lot.  I also met GWU’s Tony Yezer, who became my PhD advisor when I switched over to economics.

Later I was able to follow my international interests when I was hired to study housing markets at the World Bank, working with another great group of people including my collaborator Steve Mayo. I found housing and other urban development issues fascinating, something I was happy to study both in my home country and, when the opportunity presented itself, around the world. 

Eventually I found my way to the University of Wisconsin, where I found more excellent colleagues, including my coauthor Richard Green, and did more research on housing markets but also learned a lot about other kinds of real estate.

In 2016 I "retired" from Wisconsin -- as I've said many times over the past year or two, I retired but I didn't quit.  I'm still active on the research front, still attending conferences held by the American Real Estate and Urban Economics Association and other groups.  I serve as Dean of the faculty of the School for Advanced Studies of the Homer Hoyt Institute.  Morris Davis, a colleague at Wisconsin, is now in charge of the Rutgers Real Estate Center, and along with Morris, Julia Coronado and Kevin Riordan I regularly blog there as well.

2.      In a nutshell, how do housing markets work?

Exhibit 1

Let’s start with a schematic diagram (Exhibit 1) of the housing market. Inputs, such as land, labor, finance, materials, and infrastructure, are combined by supply-side agents, such as landlords and developers, to produce housing services. Homeowners, and to a lesser extent, renters, are also producers, because they maintain and upgrade their houses. Relative prices provide producers of housing services with information that helps to determine whether to provide more or less housing, and whether input suppliers should provide more or fewer inputs.

In many (not all!) countries, the market for housing services per se can be approximated as a competitive market.  Housing production activities (the middle box in Exhibit 1) have few natural barriers to entry, or large economies of scale. In those competitive countries, few landlords or developers are large enough to exert significant market power.

The market for many inputs may be less competitive. The ownership of land is often more concentrated. Large economies of scale may make the production of some inputs a natural monopoly, as with some types of infrastructure. Elements of the housing finance system may have economies of scale, imperfect information, and other barriers to entry and exit.  Poorly designed government regulations could also, wittingly or not, restrict the competitive allocation of inputs, especially developable land.

Many housing problems can be traced to low incomes, and need to be addressed by raising those incomes. Other problems in housing markets can be caused by problems in the input markets, especially land, finance, and in the regulatory and property rights framework of the market.

To economists, the role of government in any market is to set the “rules of the game,” including property rights, and the legal framework, and to take actions – taxes or subsidies or regulation or occasionally direct provision – that attack so-called “market failures.”  Besides the previously mentioned economies of scale and monopoly power, and poor (“asymmetric”) information, market failures can be due to what are termed externalities or spillovers. Externalities are costs or benefits that are real, but aren’t priced into the market transaction.  Housing related examples include increased traffic congestion, or water runoff associated with new developments.  Extreme poverty can be analyzed as a market failure as well.

We also have to be aware of the possibility of government failures. Just because we can cite an externality or other market failure in support doesn’t mean we’ve adopted a government intervention that improves the situation. Getting the regulatory environment right requires serious work to understand the size and nature of the market failures, and the effectiveness of the interventions proposed to mitigate them.  The same can be said of any intervention – taxes, subsidies, setting the property rights/legal framework, or direct public provision.

References

Datta-Chaudhuri, Mrinal. "Market Failure and Government Failure." The Journal of Economic Perspectives 4, no. 3 (1990): 25-39.

Franklin, Benjamin. The Autobiography of Benjamin Franklin: PF Collier, 1817.

Haveman, Robert H. The Economics of the Public Sector: John Wiley & Sons, 1976.

Isaacson, Walter. Benjamin Franklin: An American Life, 2004.

Malpezzi, Stephen. "Housing Prices, Externalities, and Regulation in U.S. Metropolitan Areas." Journal of Housing Research 7, no. 2 (1996): 209-41.

________. "Economic Analysis of Housing Markets in Developing and Transition Economies." In Handbook of Regional and Urban Economics. Volume 3. Applied Urban Economics, edited by Paul Cheshire and Edwin S. Mills, 1791-1864. New York and Oxford: Elsevier Science North-Holland, 1999.

Mayo, Stephen K., Stephen Malpezzi, and David J. Gross. "Shelter Strategies for the Urban Poor in Developing Countries." World Bank Research Observer 1, no. 2 (1986): 183-203.

Vatn, Arild, and Daniel W Bromley. "Externalities-a Market Model Failure." Environmental and Resource Economics 9, no. 2 (1997): 135-151.

Wolf, Charles Jr. Markets or Governments: Choosing between Imperfect Alternatives: MIT Press, 1993.

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