The Housing Cycle in Eastern Massachusetts: Variations among Cities and Towns
Case, Karl E., Mayer, Christopher J., New England Economic Review
Numerous studies over the years have attempted to identify the impact of amenities on housing price levels within specific metropolitan areas. It is well known, for example, that local public goods, tax burdens, school quality, crime rates, and the like are capitalized into land values.(1) While reasonably good cross-sectional data bases on house prices have been available for some time, data limitations have prevented researchers from looking at changes in home prices over time at any meaningful level of geographic disaggregation. Newly available data show that appreciation and depreciation rates over the cycle have varied widely within metropolitan areas, particularly in those parts of the country that have experienced large swings in home prices.
In Eastern Massachusetts since 1982, differences in appreciation rates across cities and towns have been pronounced. During the boom, houses in various towns appreciated in value on average from 141 to 250 percent. These variations were far from random: Houses located in towns close to Boston and towns with lower initial price levels appreciated at above-average rates. Subsequent price declines also varied significantly, between 9 and 25 percent, and the largest losses were concentrated in towns located farthest from Boston.
Case and Mayer (1995) explore the cross-sectional pattern of house price appreciation in the Eastern Massachusetts area during the 1980s boom and bust. Their study finds that affordability, proximity to downtown Boston, the shift from manufacturing to services-based jobs, the aging of the baby boom, and new construction all had significant effects on which towns' house prices rose fastest. In addition, the authors show that the premium associated with higher-quality schools actually fell during the 1980s, when Massachusetts public school enrollments declined dramatically.
This article expands upon the results in Case and Mayer (1995) by dividing the Eastern Massachusetts area into small groups of similar towns and updating the analysis, using recently acquired data from the 1991-94 period. The first part of the article discusses the previous literature. Next, similar towns in Eastern Massachusetts are grouped and the pattern of price appreciation across those groups during the boom, bust, and recovery periods is examined. This examination reveals that housing affordability was the most important factor explaining price changes during the boom period, but location, schools, and a town's employment base became relatively more consequential during the bust and the recovery.
I. Previous Results
Since Tiebout (1956) and Muth (1969), most research in urban economics has used variations in the level of public services and taxes and distance from the city center to explain differences in price levels among individual cities and towns within a metropolitan area. Although not explicitly addressed, the implication of these early articles was that changes in the relative prices between different towns are caused by unexpected development (causing a shift in the rent gradient) or changes in the level of town services or the taxes that finance them. In the Tiebout tradition, however, towns are assumed to constantly adjust their public services and zoning requirements in order to maximize the price of housing within the town. Thus, observed changes in a town's public services might be related to shifts in the cost of providing those services.
Several articles have shown that the rate of house price appreciation within a metropolitan area can vary significantly for properties in different price ranges. Smith and Tesarek (1991) develop a methodology to estimate a price index for different quality levels. Using data from Houston over several years between 1970 and 1989, they find that high-quality properties appreciated faster than average during the boom of the 1970s, but that they fell faster during the oil bust of the 1980s. …