DP7945 | Income Distribution and Housing Prices: An Assignment Model Approach

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08/08/2010

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Abstract

We present a framework for studying the relation between the distribution of income and the distribution of housing prices that is based on an assignment model of households with heterogeneous incomes and houses of heterogeneous quality. The equilibrium distribution of prices depends on both distributions in a tractable but nontrivial manner. We infer the unobserved distribution of quality from the joint distribution of income and housing prices, and use it to generate counterfactual price distributions under counterfactual income distributions. We apply the model to estimate the impact of recently increased income inequality on the distribution of house prices in 6 US metropolitan regions. We fin that the recent increase in income inequality caused average house prices to be lower. The impact of uneven income growth on house prices has been positive only within the top decile.