New Urban Development: Looking Back to See Forward

4. Housing Market Structure

Market Functions and Geographic Areas Markets “Calculate” Prices In somewhat the same way as computers are programmed with rules for performing specific calculations, laws, social norms, and physical conditions act as the operating rules that govern the choices available to the buyers and sellers in a particular market. In that sense, we may consider that markets “calculate” the price of goods and services from the data inputs of transactions between buyers and sellers. Understanding the structure of a market and recognizing the conditions affecting the structure provide a picture of how prices are determined in the market and permit us to anticipate the results likely to follow from changes to the market’s structure or the conditions affecting it. But before describing the structure of the markets in urban regional housing, I will first review the aspects that make markets good tools for allocating resources in the private sector, the limitations of markets as allocators of public goods, and the boundaries and differences of markets. In his 1963 book, The Study of Society, Alfred Kuhn brilliantly clarified that markets are information systems that convert inherently subjective values and costs into objective money amounts so a decision can be made about the allocation of resources.1 In real estate markets, the firms that Kuhn refers to are land developers, builders, and property owners deciding whether to invest their own entrepreneurial efforts and their own borrowed financial capital in urban land development and, if so, what and how to build, maintain, or remodel. These relationships are graphically represented in figure 4.1, originated by Kuhn. By factors of production Kuhn refers to all the materials and supplies— commonly referred to as resources—that humans extract from nature and that 75 4 Housing Market Structure are needed to produce goods and services. He includes in factors of production the money paid to workers and managers to obtain their services as well as the interest paid to those who lend the producers the money to pay for the materials and supplies and the workers’ salaries. Kuhn recognized that what each consumer gets in satisfaction for his purchase is a subjective, personal matter. Because the degree of pleasure or pain each of us gets from something is shaped by our individual lifetime of experiences, no third party can assign uniform measures to our reactions to a good or service—that is, how much we may want or not want any particular good or service. LOOKING AT SUBJECTIVE VALUES. The satisfaction that a couple gets from purchasing or renting the bundle of services that we refer to as a residence or house may not be the same for each person. Each partner may feel differently about the residence or house from day to day. Their changing moods and experiences will affect the satisfaction they get out of it and the surrounding neighborhood , which are affected by the nearby desirable and undesirable places and activities. For example, my wife likes going to the old Tate Museum in London because it has one of the world’s great collections of paintings by Joseph Mallord William Turner; Turner’s paintings do not stir me, but I like that museum because it has a great restaurant. LOOKING AT OBJECTIVE COSTS. The dollars the couple spends on rent, utilities , mortgage payments, maintenance, and the like are very objective. That is, the dollars that trade hands at the point of purchase quantify the value put on the good or service in a measure that all people will agree has the same value. For example, when we pay a set amount of dollars for rent, the purchase of a house, or the purchase of a bottle of beer, the amount of dollars spent quantifies NEW URBAN DEVELOPMENT 76 Consumers: Values are subjective, in utility of good purchased. Costs are objective, in money spent Transaction Firm: Values are objective, in income received from sales Costs are objective, in money spent for factor Transaction Factors of Production: Values are objective, in income received from firm Costs are subjective, in satisfaction denied by working FIGURE 4.1 Functions of Market Information Systems Source: Kuhn, The Study of Society, 567. the item’s cost to us and the other party in the transaction. The amount of money spent provides the universally understood measure of what the good or service we obtained costs and how much spending power we are giving up to...