This article appears in Journal of Financial Economics Volume 150, Issue 1.
Abstract
Remote work has increased the demand for housing and changed the demand for the location of that housing. Because housing supply is heterogeneous across space and more elastic in the long-run, the effects on rents and populations may differ over time. We use the lens of a spatial housing model with heterogeneous housing supply elasticities to identify the housing and location demand changes from 2020–2022, and show that the same shocks will have different effects in the long run. Even though rents and prices increased significantly in the short-run, we estimate that in the long-run, increased housing demand will increase rents by only 1.8 percentage points, and that changing location demand will decrease rents by 0.3 percentage points, with a more negative impact on cities in which CPI is measured and cities that were initially expensive.
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Executive Summary
The sudden increase in remote work caused dramatic changes in the U.S. housing market between 2020 and 2022. Recent research has documented that remote work raised the demand for housing (Behrens, Kichko and Thisse, 2021; Mondragon and Wieland, 2022); flattened intracity house price gradients (Brueckner, Kahn and Lin, 2021; Ramani and Bloom, 2021); and reallocated demand across cities (Delventhal and Parkhomenko, 2020; Mondragon and Wieland, 2022). During this period, real rents rose by eight percent and real house prices rose by over twenty percent. Short-run housing supply is highly inelastic, so it is natural that rapid demand increases caused rents and prices to rise; however, the long-run effects of remote work on the housing market might be quite different from those which arise during a period with little opportunity for home construction.
This paper studies the long-run effects of remote work on housing affordability and inflation, which, as we argue, are likely to be different than the short-run changes. We consider two ways that remote work might change housing demand—first, demand shifts away from the central business districts of large cities, where housing is inelastically supplied. Because demand falls in areas with an inelastic housing supply and rises in areas with an elastic one, housing costs fall on average. Second, remote work increases the demand for space because people use home offices and spend more time at home (Stanton and Tiwari, 2021). This force raises the cost of housing in both the short and long run, with long-run effects depending on the average long-run housing supply elasticity.
We study the net effect of these forces using a model of the U.S. housing market designed to capture housing demand in the short- and long-run, as well as differences in short- and long-run housing supply elasticity.
The net effect of remote work on housing costs is the sum of the effects caused by housing demand and location demand. Taken together, the long-run effect on real rents will be about two-fifths of the short-run effect. Our results also have implications for the housing component of the consumer price index (CPI). We calculate the effect on the housing component of CPI by considering the model’s implications for rents, the area which is measured for CPI. We find that the effect of location demand on CPI counties is about -2 percentage points.
The structure of the model allows us to easily calculate the long-run effects of remote work under a variety of possible scenarios. First, we consider alternative assumptions about the effects of remote work on housing demand. Second, we consider different assumptions about the future of remote work. Since the location demand channel scales linearly with the size of the shock, an increase in remote work will raise the location demand channel proportionally to our baseline estimate. Finally, we consider alternate assumptions about how remote work might affect where people decide to move.
