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Housing demand : an empirical intertemporal model Schwann, Gregory Michael


I develop an empirical model of housing demand which is based as closely as possible on a theoretical intertemporal model of consumer demand. In the empirical model, intertemporal behavior by households is incorporated in two ways. First, a household's expected length of occupancy in a dwelling is a parameter in the model; thus, households are able to choose when to move. Second, a household's decision to move and its choice of dwelling are based on the same intertemporal utility function. The parameters of the utility function are estimated using a switching regresion model in which the decision to move and the choice of housing quantity are jointly determined. The model has four other features: (1) a characteristics approach to housing demand is taken, (2) the transaction costs of changing dwellings are incorporated in the model, (3) sample data on household mortgages are employed in computing the user cost of owned dwellings, and (4) demographic variables are incorporated systematically into the household utility function. Rosen's two step proceedure is used to estimate the model. Cragg's technique for estimating regressions in the presence of heteroscedasticity of unknown form is used to estimate the hedonic regressions in step one of the proceedure. In the second step, the switching regression model, is estimated by maximum likelihood. A micro data set of 2,513 Canadian households is used in the estimations. The stage one hedonic regressions indicate that urban housing markets are not in long run equilibrium, that the errors of the hedonic regressions are heteroscedastic, and that simple functional forms for hedonic regressions may perform as well as more complex forms. The stage two estimates establish that a tight link between the theoretical and empirical models of housing demand produces a better model. My results show that conventional static models of housing demand are misspecified. They indicate that households have vastly different planned lengths of dwelling occupancy. They also indicate that housing demand is determined to a great extent by demographic factors.

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