Wednesday, November 28, 2012

Two Interesting Pieces About Real Estate Economics

The WSJ reports that Chinese investors are building residential housing in New York City targeted to Chinese mainland buyers.   This doesn't appear to be ethnic favoritism.  Instead, the developers want less risk where the risk is that they will build a building that will remain vacant and commitment by Chinese buyers to purchase units both reduces risk for the developer and creates a Chinese community  in the new building.  This is an example of endogenous attributes in differentiated products.  Consider the case of Mercedes cars. If this luxury car was only purchased by losers, would Mercedes be a "great brand"?  IO economists are still wrestling with how to model the demand for differentiated products in cases in which the average characteristics of the buyers of a product becomes another attribute of the product.  Multiple equilibria can arise in this case.  Pat Bayer and Chris Timmins of Duke have studied this problem.  See their Economic Journal paper.   The Chinese investors have figured out how to exploit this to their advantage.

There is also a piece about Los Angeles real estate focused on Playa Vista.  When you land at LAX, you see a huge vacant space with no economic activity.  I have often wondered why it didn't fill in with development. This piece focuses on this dynamic.   In the past, you could have argued that the airport is noisy and this is a major disamenity.  Dan McMillen has documented that new generations of airplanes are much quieter.  Quality can offset quality of life challenges in cities!  For an example, here is my paper on California air pollution trends.

UPDATE:  My short YouTube videos on key ideas in environmental and urban economics are posted here.