REGIONAL HOUSING SUPPLY AND CREDIT CONSTRAINTS

The construction of new housing plays a critical role in the economy, yet it is understudied by researchers. Increases in housing starts rai se construction employment, and recent home buyers often purchase othe r consumer durables, leading through, the multiplier effect to increas ed employment. Construction is especially important to the business cy cle, because changes in residential construction tend to lead recessio ns and recovery. Despite its importance, empirical research on housing supply is surprisingly rare. This article presents a new empirical mo del of housing supply that: reflects the land development process and is consistent with the time-series characteristics of the data. The au thors apply this model to the four U.S. Census regions and estimate re gional housing start elasticities, which range between 0.9 and 3.9. Th eir estimates also show a prolonged period of below-predicted construc tion in the Northeast during the early 1990s that does not appear duri ng the downturns in other regions. These results are consistent with t he hypothesis that a severe negative shock to local asset values (and thus bank capital), possibly combined with changes in banking regulati on, led to a ''credit crunch'' that reduced new housing construction.