Urban Economics and Real Estate Markets. - book reviews

Business Economics, Oct, 1996 by Thomas M. Fullerton, Jr.

Real-estate markets involve participants from virtually every walk in life. They range from single persons living in one-room studio apartments to large-scale manufacturers seeking low-cost public utilities near major transportation facilities. Urban Economics and Real Estate Markets provides an introduction to the fundamental forces at work in this important business sector. The general approach is analytic, quantitative, and tutorial. Nevertheless, the authors present sufficient operational, policy, and empirical examples to interest business economists and consultants who work in this sector or others that are related to it.

A unique achievement of the book is the manner in which it fully integrates the diverse relationships that drive the three major real-estate markets (residential, commercial, industrial). In contrast to some texts covering related areas that are little more than disjointed collections of ad hoc analyses, each topic is developed using an internally consistent blueprint. Fundamental economic forces determine outcomes in particular markets of interest, and the models generally build upon what has been presented in earlier chapters. The presentation incorporates metropolitan, regional, and business cycle growth patterns. Doing so unveils the mysteries of potentially arcane topics in a manner that makes them accessible and less abstract. Representative topics include spatial equilibria, sectoral dynamics, expectations, public goods, externalities, and market failure. All are presented in a rigorous, yet user-friendly, manner that provides good insights into economic behavior and market impacts.

The authors set a business-like tone by directly introducing a detailed model of both the property rental and asset ownership markets in real estate in Chapter 1. The beauty of the book becomes immediately apparent as the authors expertly combine concise language, mathematical equations, analytical diagrams, and frequent empirical examples. Clarity of exposition allows the reader to take full advantage of whichever tool is being utilized to illustrate a particular topic. Chapter 2 lays additional groundwork by presenting a breakdown of property classes, market areas, and the interplay of microeconomic factors with macroeconomic growth patterns.

Part 2 details the microeconomic analysis of property markets and location theory. Chapters 3 and 4 analyze residential real estate, including an insightful illustration of housing values, accomplished by regressing individual unit prices against physical attributes and other amenities associated with each property. Known as hedonic price modeling, the technique indicates that an additional bedroom in a typical house in Boston adds approximately $14,000 to its price. Bathrooms are even more important; they increase the price of a dwelling unit by nearly $51,000. Also covered is a helpful marriage of theory and historical observation by means of a review of land use development over time in the Boston metropolitan statistical area (MSA). By taking advantage of comprehensive data sets that exist for the 146 towns that comprise this MSA, the authors build expositions of key concepts into the text. Nonresidential property markets are dealt with in Chapters 5 and 6. The latter provide extensive discussions of firm site selection and retail outlet cluster and dispersion theory.

Section 3 develops a comprehensive overview of the macroeconomic analysis of residential and nonresidential property markets within the context of traditional urban and regional growth modeling and multiplier impacts. Particularly helpful is a discussion of real-estate cycles with market clearing but in the absence of business fluctuations induced by national policy mistakes. That these industry-specific turning points, byproducts of the lags inherent in construction finance and building completions, result under a variety of expectations assumptions (naive, adaptive, and perfect foresight) without deviations from trend growth rates at the national level may come as a surprise to some macro theorists. While slightly more realistic forward-looking rationality could easily have been assumed, the potential for sector-specific market fluctuations without federal policy causation would remain intact, a reality that business economists frequently observe across regional markets. Modified stock-flow models without market clearing are subsequently developed and estimated for office and industrial space, further enhancing the relevance of the book to applications-oriented members of the profession who analyze markets characterized by varying degrees of volatility. Chapter 12 estimates systems of equations models for the office space market in San Francisco and the industrial space market in Philadelphia as examples of situations in which mismatches between demand and supply persist over extended periods of time.

Part 4 discusses the interplay between local governments and real-estate markets. Succinct insights are provided with respect to coordination problems, market failure, and the occasional necessity for administrative intervention in order to permit the optimal allocation of developed land resources in metropolitan economics. Chapter 13 illustrates why it makes sense for suburban areas to cooperate with decaying inner cities in order to maximize regional economic prospects and property values. Chapter 14 shows how real-estate markets can have potential multiple equilibria, clarifying with ease an outcome often associated with more advanced game theory analysis.