Housing market segmentation

From HousingWiki

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. 


"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].

"The definition of housing submarkets:
The earliest use of submarkets as a key concept in housing analysis was based on the economic concept of substitution (see Fisher and Fisher, 1954; Grigsby, 1963; Rapkin et al, 1953). Substitutability, in this sense, requires demanders to be indifferent between the entire bundle of physical, locational, and neighbourhood quality attributes which characterise the competing housing units. Although obviously this implies that the structural characteristics of a dwelling are important in determining the submarket it will be traded in, there is no guidance on the spatial dimensions of submarkets. The neighbourhood and accessibility attributes suggest that spatial characteristics matter, but there is no consideration of the way in which search costs and information constraints may impose geographic limits on substitutability.

"Despite this, however, several empirical studies of submarket existence which followed assume that spatial characteristics are more important than structural characteristics. Ball and Kirwan (1977, page 15) note that ``sub-markets might arise if there were restrictions on the freedom of buyers and sellers to enter the market in certain geographical areas(emphasis added). Specifically, they consider restrictions on demanders through housing affordability or the availability of mortgage finance as possible spatial constraints. They also, however, argue that the historical characteristics of the stock may introduce spatial segmentation. This view finds support elsewhere (see Goodman, 1981; Michaels and Smith, 1990; Palm, 1978).

"In other studies, submarket structures have been proposed which are based on the identification of distinct subgroups of demanders. Implicitly, buyer subgroup preferences are based on their view of the spatial and structural characteristics of available housing units. Schnare and Struyk (1976) and Munro (1986) examine high-income and lowincome groups; and Munro (1986) also examines subgroups based on the degree of difficulty experienced during the search process."


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."
   - [Watkins 2001].


Racial structuring and segregation

from [Stearns & Logan, 1986]:

"Ecological expansion theory states that racial segregation occurs as part of the normal life cycle of an SMSA. Individual preferences working through the marketplace lead to differentiation between suburban communities. This paper questions the assumptions of a free and open market. An alternative model—the dual housing market model—views the housing market as structured to provide very different opportunities for blacks and whites. Hypotheses generated by each model about changes in the two components of black residential patterns—the total percent black in suburban rings and the distribution of blacks among suburbs—are tested for the 1970–80 decade. Based on 44 large suburban regions, the results support the dual housing market model. We suggest that the racial structuring of the housing market underlies the ecological processes presumed to determine changes in black suburbanization and segregation."


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."

[see expanded, published paper developed from the above : Immergluck et al, 2017].

We examine losses in affordable rental units in central cities in a key region of the United States, the South. We examine changes in low-cost rented units across eight large central cities, and then identify neighbourhood characteristics associated with such changes. Finally, we estimate a similar model in two of the cities with the greatest amount of loss in low-cost units and that have different overall housing market conditions – one a ‘hot market’ (Nashville, Tennessee) and one a ‘cool market’ (Memphis, Tennessee). We find that, generally, a number of neighbourhood conditions are associated with greater losses of low-cost units, including more young (25–34) adults, fewer public housing units, more initial low-cost units, and a larger percentage of newer units. However, these relationships do not show up consistently in the Memphis and Nashville models. The presence of younger adults (especially those aged 25–34) is a strong predictor of losing low-cost rental units in Nashville but is not a significant predictor in Memphis. Second, the presence of public housing units appears to serve as a buffer against the loss in low-cost units in a neighbourhood, but not in Memphis or Nashville, perhaps because they have fewer public housing units altogether."