Ritashree Chakrabarti and Junfu Zhang Abstract

Housing price and its growth vary a great deal among different regions in the United States. In regions where housing price is high or grows fast, there are always concerns that unaffordable housing could have a negative effect on local economic growth. Although such concerns are reasonable, there have not been careful empirical studies to examine the effects of unaffordable housing. . In regions where housing price is high or grows fast, there are always concerns that unaffordable housing could have a negative effect on local economic growth. Although such concerns are reasonable, there have not been careful empirical studies to examine the effects of unaffordable housing.

In this paper, we develop a simple model to clarify why housing affordability could affect employment growth and firm formation in a regional economy. We empirically measure such effects using data on California cities. Based on our theoretical model, we use the ratio of median housing price to median household income as the measure of affordability. We employ various identification strategies to account for potential endogeneity and omitted variables problems in our empirical analysis. Most importantly, we use climate amenity variables to instrument for housing affordability. Our findings provide consistent evidence that unaffordable housing indeed causes slower employment growth at the city level. There is also some evidence that unaffordable housing negatively affects the formation of new firms, although this result is less robust to alternative specifications. cities. Based on our theoretical model, we use the ratio of median housing price to median household income as the measure of affordability. We employ various identification strategies to account for potential endogeneity and omitted variables problems in our empirical analysis. Most importantly, we use climate amenity variables to instrument for housing affordability. Our findings provide consistent evidence that unaffordable housing indeed causes slower employment growth at the city level. There is also some evidence that unaffordable housing negatively affects the formation of new firms, although this result is less robust to alternative specifications.