YIMBY research wanted: demand cascade

We have no studies of the key mechanism driving the housing crisis

The key mechanism underlying the housing crisis is the ‘demand cascade’: upper-class people move in and bid up the price of high-end homes, which pushes middle-class locals to compete for low-end homes, which forces the poor to take on roommates, move away, or become homeless. However, no one has written a paper showing how this works empirically.

But it seems straightforward to implement. We can use a Bartik shifter for college-educated workers (compare Edlund et al. 2022) as the increase in high-end demand, and show that prices and rents rise for both high- and low-end housing. This would prove that high- and low-end submarkets are connected, with increases in high-end demand driving up low-end prices and reducing affordability. Hence, high-end supply is needed to absorb high-end demand and prevent a demand cascade. (We can also use a demand shifter for non-college workers as an increase in low-end demand; this should affect only the low-end market.) As an extension, use the Baum-Snow and Han (2024) supply elasticities to show that the demand cascade is stronger when supply is more restricted.

We can define quality segments simply as home age, or by estimating a richer model of quality using home characteristics. With data on residential addresses, we could study the effect on displacement (evictions, or moving to a poorer neighborhood) and gentrification (in-migration from a richer neighborhood). And with data on families, we could show that higher demand leads to larger households via doubling-up.

Another angle is studying who is affected by demand cascades. Rent control can shield existing renters from market forces, which means the demand pressure is redirected to newcomers or young adults wanting to move out on their own. Hence, we should compare the effect of a demand cascade in cities with and without rent control.

Read my literature review on gentrification and displacement.