Housing Bubbles and Busts: The Role of Supply Elasticity

Existing studies of the relationship between housing price dynamics and housing supply—which have relied upon questionable proxies for supply elasticity—have yielded highly mixed results. In this paper we provide new evidence on this relationship based on actual estimates of the price elasticity of supply for local markets in Florida. Intermarket differences in housing supply elasticity are found to explain much of the variation in housing price movements and new construction during the most recent boom-bust cycle. Additionally, we find that variance in the elasticity of housing supply can be attributed to differences in land availability and the local fiscal and regulatory environment. (JEL R14)