Economic Theory and Conclusion, Essay Example

Economic Theory

Donald and Winkler (2002) find evidence in their article suggesting that housing values are sensitive to changing in population. Consider the supply-demand model; the higher the population density, the higher the price of housing. The higher population density will increase the demand for housing and cause shortages in the housing market. In order to obtain new equilibrium, the price of housing will increase, which is why population density will affect housing prices. The cities with higher costs of living will have higher prices of houses as well. Cost of living can also reflect the living standards of cities. Living standards indirectly reflect the economic development of the city. In theory, the more developed the economy of a region is, the higher the price of commodity housing. Another indispensable factor is household income. It is proportional to housing prices. Consumers want to improve their living standards and the desire for investment also increases when they have more income. Houses are a value-added commodity compared to others. Thus, large investments in housing may stimulate housing prices. If income affects housing prices, then employment rates may also be influenced since the higher rate of unemployment lead to the median household income getting lower. According to the wage market, there is negative correlation between unemployment rates and wages. The density of housing may also influence its value. This is because higher density means that there are more houses per square mile. The supply for the houses increases and this will lead to the price being decreased. Contract rent is also proportional to housing prices because the higher price of houses causes the rent to be higher. Housing value means that a house would sell in the real estate market given that the supply and demand are in the same condition. However, housing prices are what the market is based on.

Conclusion

These empirical findings demonstrate in the cost of living index that household income and median contract rent carry a substantial effect on housing value. The inclines in the units of costs of living will increase the housing value of the city. The effect of household income on housing values is different as it is higher in the top twenty cities than it is in others. The increases in contract rent will lead to housing value increases as well. We have reason to believe that the cost of living index, household income, and contract rent will influence the housing value.

Unemployment rate, population density, and the density of houses do not have significant statistical impact on housing values; which is not consistent with my hypothesis. One possible reason could be that the sample is too small. The dataset only has 100 observations. More observations will raise the accuracy of the results. Moreover, the dummy variables are the top twenty cities with largest population from the 100 observations. However, they are not the top twenty cities in United States. Therefore, the data is not reliable enough.

In addition to the independent variables that we discussed, the study can further consider the government regulation as it affects the housing value. Cities like Boston and New York have rent control. Rent control means that the city government sets limitations on how much landlords are permitted to increase their rent on existing tenants. This is common in cities that have greater populations where the government would want to ensure the city has affordable housing for lower class residents. Rent control will always directly influence the housing value.