The Dynamics of the Housing Market: A Stock Adjustment Model of Housing Consumption

Eric A. Hanushek
John M. Quigley
Published Date
January 1979
Journal of Urban Economics
pp. 90-111

The importance of transactions costs and conversion costs in the market for residential housing suggests that the observed housing consumption of an individual household will generally differ from its “equilibrium” level of demand (i.e., the housing consumption freely chosen in a frictionless world, given prices, incomes, and tastes). This paper develops an explicit model of this process and provides estimates of alternative stock adjustment models for two samples of renter households. Desired or “equilibrium” housing demand models are estimated from samples of recent mover households; these demand parameters are then used to estimate the rate of adjustment to household equilibrium. The empirical analysis is replicated for two samples and for two time intervals. The results strongly indicate that there are significant lags in adjustment, even for low income renter households. Failure to account for this dynamic structure may give misleading conclusions about the operation of the housing market in the short run and the effects of public policies.