The Maze of Urban Housing Markets.

• Author: Phillips, Richard A.

In this book a theoretical and empirical framework for analyzing the diversity of urban housing markets is presented. The housing market is, according to the authors, characterized by "segmentation" by both demanders and suppliers. This segmentation is a consequence of the unique features of housing, which include spatial immobility, durability, heterogeneity, and modifiability. An implication of spatial immobility (and durability) is that demanders of housing services (in particular, owner occupied) will make choices based on an array of public and private services associated with the fixed location. These patterns of demand, which will vary for a given individual with life cycle, economic, and other circumstances, produce a complex "quality-service" segmentation. The urban housing market is thus characterized as an aggregation of noncompeting submarkets. Demanders of the services provided by a given submarket are relatively unresponsive to market and price adjustments in other noncompeting submarkets. The result is highly inelastic demand for a given segment. Substitutability is further reduced by the high cost of adjustments to housing consumption and investment. In addition to its intuitive appeal, this view of the housing market also conforms with casual observation. For example, the quality service segmentation hypothesis explains positive price appreciation for certain segments of the residential housing market at a time of excess supply of housing in the aggregate.

There is, of course, nothing new in noting the diversity of urban housing markets. The results of the voluminous hedonic pricing literature clearly support the service-quality segmentation hypothesis. These studies, which regress measures of housing quality and locational characteristics on house value, consistently indicate that market prices reflect the capitalization of service amenity values (for example, public school quality). Service-quality diversity across the housing stock explains why physically identical units located in different areas may have significantly different market values. A separate strand of the hedonic pricing literature suggests that the primary choice variable for the household is the "neighborhood" and the mix of services provided. Given the appropriate neighborhood choice, the demand for a specific unit is relatively elastic.

The obvious limitation of hedonic pricing analysis is that because housing market equilibrium points are presupposed...