Abstract: Paper No. 166

Incorporating the Number of Existing Home Sales into a Structural Model of the Market for Owner-Occupied Housing

James R. Follain and Orawin T. Velz

August 1994 

The principal purpose of this paper is to develop and estimate a structural model of the housing market. The structural model presented is like many previously presented models of the housing market. It contains a demand equation, a supply equation, and an equation to explain the number of homeowner households. Its principal distinguishing feature is its attempt to incorporate the rate of housing sales into the model. This is done by adding a fourth equation to the model that explains the housing sales or turnover rate and by including the turnover rate in the supply equation. Housing sales are measured using the NATIONAL ASSOCIATION OF REALTORS® (NAR) Existing Homes Sales Survey and are found to be negatively related to the level of housing prices. This particular result is in contrast to several recent papers that find a positive relationship between housing sales and the housing prices, e.g., Berkovic and Goodman [1994], Genesove and Mayer, [1993], and Stein [1993]. Other important results include: 1) the number of home owners is determined in large part by the size of the population of the metropolitan area; 2) the price elasticity of supply is quite large; 3) the demand for housing per household performs reasonably well; and, 4) the reduced form equations seem reasonable.

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