Home prices in regions with inelastic supply should be expected to rise more rapidly in response to growing demand than prices in regions with elastic supply. And it seems quite reasonable for respondents to assume that supply is relatively inelastic in cities where “there is just not enough land available.” Growth in income per capita, for example, should be expected to have a greater effect on home prices in San Francisco than in Houston. Similarly, it seems quite reasonable for respondents to view the phrase “because lots of people want to live here” as indicating expected future growth in housing demand. Hence Baily did not regard the responses as necessarily revealing confusion between levels and rates of change. He added that, with sticky prices, even a demand shock that shifts the long-run equilibrium level of prices would be expected to lead to a higher rate of growth of prices over the short run.
Loading...