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The Maze of Urban Housing Markets.

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 adjustments to equilibrium cannot be analyzed. Thus, it is not possible to analyze the behavior of market participants with regard to housing demand, supply, and tenure choice decisions. The authors correctly note that the literature has not incorporated the insights of the hedonic pricing approach into market behavior analysis. For example, in the housing demand literature a typical approach is to relate individual characteristics to the demand for "housing services", which are generally proxied by expenditure levels. The benefit of this approach is the conformance to existing research methodologies: housing market decisions can be analyzed as another consumer choice exercise and numerous empirical studies have provided the standard income and price elasticity estimates. The problem is that the factors which make housing truly unique, which are thoroughly detailed in the Maze, cannot be addressed in this framework.

This brings us to the primary contribution of the book: bridging the gap between the hedonic valuation studies and the microeconomic analysis of housing market behavior by explicitly modeling the heterogeneity (segmentation) of the housing market. This is accomplished by using hedonic indexes to derive weights for the service bundles which are implicit in the market value of housing. Using these indexes, the quality level of each unit of the housing stock is estimated. These quality level estimates are used to generate a distribution of housing service submarkets. Housing demand for an individual household is then based on the various components of quality and the relative prices of these quality bundles. This general approach is used in the empirical section of the book to test the segmentation hypothesis and to generate parameter estimates of housing demand and supply behavior.

The authors note that their main purpose is the elaboration of the market segmentation theory and its implications. As such they are primarily concerned with an empirical analysis that is sufficient to determine the feasibility of the approach rather than an exhaustive econometric treatment. In this vein, market period and intermediate run demand and supply estimates are generated for both a cross section sample of SMSAs and an intra SMSA analysis of Des Moines, Iowa. While this work must be viewed as preliminary, the findings generally support the segmentation hypothesis. For example, as expected, all relevant demand and supply elasticities vary substantially by submarket. There are other noteworthy findings and implications which are far too numerous to discuss here. In assessing their work, the authors detail the policy implications and correctly note that the segmentation framework has important implications for all of the traditional housing policy issues (for example, redevelopment/renewal, rent burdens, slums, etc.)

A major advantage of this book is that it can be read on numerous levels. Academic specialists in Real Estate and Housing Economics will find it to be both a useful survey of the existing literature as well as a worthwhile and thought provoking contribution to the literature. For such individuals, the theoretical derivations and other technical portions of the book are presented and thoroughly detailed. For the benefit of nonacademic practioners and policymakers, highly readable summaries and surveys of the technical portions and there implications are presented. At the cost of some redundancy, the result produces benefits for all.

In addition to addressing the various levels of readership, the book is also well organized and presented in a logical and consistent fashion. The introduction provides an excellent overview of the scope of the work, the problems it addresses and the contributions made. In the literature review chapter, the major strands of research are first summarized for each of five categories: the nature of housing, housing demand, new housing supply, supply from the existing stock, and housing market interaction models. The authors then indicate their approach and how it contributes to the literature. Overall, this is an excellent treatment of the complexity of the urban housing market. It takes a major step in the direction of integrating the hedonic pricing and market behavior components of the literature.
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Author:Phillips, Richard A.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Oct 1, 1993
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