Housing market segmentation

Housing market segmentation, or housing submarkets, is a conceptual model for analyzing housing which emphasizes that housing markets have distinct and heterogenous 'compartments'. This calls attention to possibilities such as standard analytical tools applying poorly (e.g. "single price function" based on estimates of total supply and demand); or that discontinuities across segments are important for explaining market dynamics. 
 

Background

"In the 1940s and 1950s a group of US researchers exploring the operation of local housing systems developed `filtering models' as a conceptual framework for applied studies (for example, see Fisher and Fisher, 1954; Rapkin and Grigsby, 1960). A central assumption in the filtering models was the existence of housing submarkets. Implicitly it was assumed that the housing market is characterised by a set of interrelated compartments among which households and existing dwellings can move (see Galster, 1996 for a review)."

"There is no single, coherent definition of a housing submarket. For example, some researchers have defined submarkets as consisting of all dwellings within a specific geographical area (see, inter alia, Palm, 1978; Straszheim, 1975). Others have suggested that submarkets comprise all dwellings, irrespective of their location, which possess similar physical characteristics and represent relatively close substitutes to potential purchasers (Dale-Johnson, 1982; Grigsby, 1963). Second, even when researchers agree on a definition based on structural or locational features, there is little consensus as to how submarkets should be identified in practice. Consider previous attempts to define submarkets spatially. Ball and Kirwan (1977) use census boundaries; Hancock (1991) aggregates contiguous postcode sectors on the basis of statistical criteria; Michaels and Smith (1990) survey estate agents; and Straszheim (1975) aggregates census tracts on the basis of racial composition." 
   - [Watkins 2001].

 

from [Goodman & Thibodeaub 1998]: 

"Housing submarkets are typically defined as geographic areas where the price per unit of housing quantity (defined using some index of housing characteristics) is constant. This paper defines housing markets as geographic areas where (1) the price of housing (per unit of service) is constant and (2) individual housing characteristics are available for purchase. We examine housing market segmentation within metropolitan Dallas using hierarchical models and single-family property transactions over the 1995:1 through 1997:1 periods. We supplement the transaction data with information on elementary school student performance for public elementary schools. A demonstration of the technique using data for the Carrollton–Farmers Branch Independent School District suggests that the metropolitan Dallas housing market is segmented by the quality of public education (as measured by student performance on standardized tests). We also conclude that hierarchical models provide a useful framework for delineating housing submarkets. Finally, while this paper examines single-family housing submarkets, the methodology could be adapted to other property types to delineate submarket boundaries for multifamily, office, retail, and industrial/warehouse properties."

 

Application to housing prices and supply

from [Immergluck 2015]: "Examining Recent Declines in Low-Cost Rental Housing in Atlanta:

"Those without an understanding of the segmented nature of housing markets may leap to the conclusion that the increasing supply of luxury units will lower the cost of lower-end units by increasing the overall supply of rental housing. There is a serious problem with this logic. First, as the industry follows a herd mentality by chasing the luxury rental market, owners of, and investors in, lower-cost units may disinvest out of more affordable units, converting them to upscale, much more expensive units or demolishing them to make way for luxury units or nonresidential uses. While the increased development of luxury units may have a marginal negative effect on high-end rents, this activity may actually draw capital away from the more affordable sector leading to disinvestment and shrinkage of that supply. The two ends of the market are in-fact segmented from each other, but they compete for land and capital and so the proliferation of the luxury market may, in fact, result in less on the more affordable end. Meanwhile, those with modest incomes may be faced with higher rents in the lower-cost segment of the rental market, or may even try to stretch themselves – perhaps too far - to afford a small but expensive unit in the luxury market.
     "In fact, while developers have been aggressively competing over building in the luxury rental market, the available evidence suggests that the number of affordable, low-cost rental units has declined in the city. While data on such affordable units is not perfect, we can look at the
federal American Community Survey to examine some information on occupied, low-cost units to get at least a partial picture of what is going on."

 

 

 

References 

• Goodman, Allen C., and Thomas G.Thibodeaub (1998). "Housing Market Segmentation." Journal of Housing Economics, Volume 7, Issue 2, June 1998, Pages 121-143. https://doi.org/10.1006/jhec.1998.0229.
   
• Immergluck, Dan (2015). "Examining Recent Declines in Low-Cost Rental Housing in Atlanta, Using American Community Survey Data from 2006-2010 to 2009-2013: Implications for Local Affordable Housing Policy." October 12, 2015. 
  http://big.assets.huffingtonpost.com/Atlanta_Rental_Study_Immergluck.pdf.
   
• Watkins, Craig A. (2001). “The definition and identification of housing submarkets.”  Environment and Planning A, 2001, volume 33, pages 2235 - 2253. DOI:10.1068/a34162 http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.455.4411&rep=rep1&type=pdf.