What do you learn about price and income elasticities of housing demand among subgroups of population?

EXAMPLE 4.4 THE DEMAND FOR HOUSING Housing is typically the most im- portant single expenditure in a household's budgeton average, households spend 25 percent of their income on housing. A fam- ily's demand for housing de- pends on the age and status of the household making the purchasing decision. One approach to the housing demand is to relate the number of rooms per house for each household (the quantity demanded) both to an estimate of the price of an additional room in a house and to the household's family income. (Prices of rooms vary because of 3For a survey of statistical studies of demand and supply elasticities and an analysis of the US. wheat market, see Larry Salathe and Sudchada Langley, \"An Empirical Analysis of Alternative Export Subsidy Programs for US Wheat,\" Agricultural Economics Research 38, No. 1 (Winter 1986). See also Michael I. Roberts and Wolfram Schlenker, "Identifying Supply and Demand Elasticilies of Agricultural Commodities: Implications for the US. Ethanol Mandate," American Economic Review Vol. 103, No. 6 (October 2013): 226595. TABLE 4.4 GROUP Single individuals Married, head of household age less than 30, 1 child Married, head age 3039, 2 or more children Married, head age 50 or older, 1 child differences in construction costs, including the price of land.) Table 4.4 lists price and income elasticities for different demographic groups. There are significant differences among subgroups of the population. For example, families with young household heads have a price elasticity of -O.25, which is more price elastic than the demands of fami lies with older household heads. Presumably, families buying houses are more price sensitive when parents and their children are younger and there may be plans for more children. Among married households, the income elasticity of demand for rooms also increases with age, which tells us that older households buy larger houses than younger households. For poor families, the fraction of income spent on housing is large. For instance, renters with an income in the bottom 20 percent of the income distribution spend roughly 55 percent of their income on hous ing, as compared to 2.8 percent of income for house Amwmwmw PRICE AND INCOME ELASTICITIES OF THE DEMAND FOR ROOMS PRICE ELASTICITY INCOME ELASTICITY O.10 0.21 O.25 0.06 O.15 0.12 0.08 0.19 would be spent primarily on items other than hous- ing. By comparison, the income elasticity for housing among the wealthiest households (the top 10 percent) is about 0.54. This discussion assumes that consumers choose their expenditures on housing and other goods to max- imize their overall satisfaction, where the benefits of housing (and thus the demand for housing) arise from the amount of living space, the safety of the neighbor- hood, the quality of schools, etc. In recent years, how- ever, the demand for housing has been partly driven by speculative demand: People bought homes under the assumption that they can resell the homes in the future at a much higher price. Speculative demanddemand driven not by the direct benefits one obtains from own- ing a home but instead by an expectation that the price will increasehas caused housing prices in many parts of the United States to increase sharply, far more than could be justified by demographics. nmlagmlmqbuhlaln m income elasticity of demand for rooms also increases with age, which tells us that older households buy larger houses than younger households. For poor families, the fraction of income spent on housing is large. For instance, renters with an income in the bottom 20 percent of the income distribution spend roughly 55 percent of their income on hous- ing, as compared to 2.8 percent of income for house- holds overall.4 Many government programs, such as subsidies, rent controls, and land-use regulations, have been proposed to shape the housing market in ways that might ease the housing burden on the poor. How effective are income subsidies? If the sub- sidy increases the demand for housing substantially, then we can presume that the subsidy will lead to improved housing for the poor.5 On the other hand, if the extra money were spent on items other than housing, the subsidy will have failed to address policy concerns related to housing. The evidence indicates that for poor households (with incomes in the bottom tenth percentile of all households), the income elasticity of housing is only about 0.09, which implies that income subsidies mmmmmmeEWWWWEWY speculative demand: People bought homes under the assumption that they can re-sell the homes in the future at a much higher price. Speculative demanddemand driven not by the direct benefits one obtains from own- ing a home but instead by an expectation that the price will increasehas caused housing prices in many parts of the United States to increase sharply, far more than could be justified by demographics. Speculative demand can lead to a bubblean increase in price based not on the fundamentals of demand, but instead on a belief that the price will keep going up. Eventually, bubbles burstthe price stops rising as new buyers stop coming into the mar ket, owners of the good become alarmed and start to sell, the price drops, more people sell, and the price drops further. As we will see in Chapter 5, bubbles are problematic because they can distort the func- tioning of a market and lead to financial dislocations when they burst. That is what happened to the US. housing market, which experienced a housing price bubble that finally burst in 2008, leading to mortgage defaults and contributing to the financial crisis that hit the US. and the global economy in late 2008