Berkeley Program on Housing and Urban Policy

Research on climate change suggests that small improvements in the "sustainability" of buildings can have large effects on greenhouse gas emissions and on energy efficiency in the economy. This paper analyzes the economics of "green" building. First, we analyze a panel of office buildings "certified" by independent rating agencies, finding that large recent increases in the supply of green buildings and the unprecedented volatility in property markets have not significantly affected the relative returns to green buildings. Second, we analyze a large cross section of office buildings, demonstrating that economic premiums in rent and asset values are substantial. Third, we relate the economic premiums for green buildings to their sustainability, confirming that the attributes rated for both thermal efficiency and sustainability contribute to premiums in rents and asset values. Even among green buildings, increased energy efficiency is fully capitalized into rents and asset values.

This paper provides the first systematic analysis of the choice by organizations to occupy green office space. We develop a framework of ecological responsiveness, and we formulate five propositions to explain why specific firms and industries may be more likely to lease green space. We test these propositions by analyzing the decisions of more than 11,000 tenants to choose office space in green buildings or in otherwise comparable non-green buildings located nearby. We find that corporations in the oil and banking industries, as well as government-related and non-profit organizations, are among the most prominent green tenants. After appropriately controlling for building quality and for location within one quarter mile, our empirical analysis shows that firms in mining and construction and organizations in public administration are relatively more likely to lease green rather than conventional office space. Furthermore, organizations employing higher levels of human capital (as measured by skills and compensation) are more likely to lease green office space.

It is widely accepted that aggregate housing prices are predictable, but that excess returns to investors are precluded by the transactions costs of buying and selling property. We examine this issue using a unique data set -- all private condominium transactions in Singapore during an eleven-year period. We model directly the price discovery process for individual dwellings. Our empirical results clearly reject a random walk in prices, supporting mean reversion in housing prices and diffusion of innovations over space. We find that, when house prices and aggregate returns are computed from models that erroneously assume a random walk and spatial independence, they are strongly autocorrelated. However, when they are calculated from the appropriate model, predictability in prices and in investment returns is completely absent. We show that this is due to the illiquid nature of housing transactions. We also conduct extensive simulations, over different time horizons and with different investment rules, testing whether better information on housing price dynamics leads to superior investment performance.

This paper provides a survey of federal housing programs, establishing the primary importance of indirect and off-budget activities in promoting housing and providing subsidies to housing consumers. We consider the role of the Government Sponsored Enterprises (GSEs) and the Veterans’’ Administration in supplying liquidity and credit guarantees. We then consider in more detail the role of the FHA as supplier and guarantor of credit. We especially focus on the rationale for these activities in the light of the rise and subsequent collapse of the subprime mortgage market. We suggest that a reinvigorated FHA mortgage program will be highly useful in its own right and might be the appropriate agency to assume many of the activities currently undertaken by the GSEs.

The most significant U.S. housing subsidy programs are funded by tax expenditures through the Internal Revenue Code (IRC). Beyond the subsidy to homeownership provided to all owner occupants through the personal income tax, the IRC provides additional subsidies to specific groups of homeowners. The Mortgage Revenue Bond (MRB) program permits lower levels of government to issue tax-exempt debt, using the proceeds to supply mortgages at below-market interest rates to deserving households. States are also permitted to issue and distribute Mortgage Credit Certificates (MCCs) which entitle recipient homeowners to claim a tax credit for some portion of the mortgage interest paid rather than the tax deduction claimed by other homeowners.

This paper documents the wide variations in reliance upon MCCs and MRBs across the United States and the emergence of Mortgage Credit Certificates as the largest housing program administered by the state of California. The paper provides an economic analysis of the MCC program using micro data on program recipients in California during the period 1996-1998. We estimate the extent and distribution of MCC subsidies across income and demographic groups, measuring the dollar amount of federal subsidies and their effects upon the user cost of residential capital and the demand price of housing. We analyze the geographic incidence of MCC subsidies across neighborhoods of varying socio-demographic composition and deprivation. Finally, we note important differences in the administrative and programmatic costs of MCCs and MRBs, suggesting that there are clear reasons to favor Mortgage Credit Certificates as a means of subsidizing deserving households.

This paper provides the first credible evidence on the economic value of the certification of "green buildings" -- value derived from impersonal market transactions rather than engineering estimates. For some 10,000 subject and control buildings, we match publicly available information on the addresses of Energy Star and LEED-rated office buildings to the characteristics of these buildings, their rental rates and selling prices. We find that buildings with a "green rating" command rental rates that are roughly three percent higher per square foot than otherwise identical buildings - controlling for the quality and the specific location of office buildings. Ceteris paribus, premiums in effective rents are even higher - above six percent. Selling prices of green buildings are higher by about 16 percent.

For the Energy-Star-certified buildings in this sample, we subsequently obtained detailed estimates of site and source energy usage from the U.S. Environmental Protection Agency. Our analysis establishes that variations in the premium for green office buildings are systematically related to their energy-saving characteristics. For example, an increase of ten percent in the site energy utilization efficiency of a green building is associated with a two percent increase in selling price - over and above the 16 percent premium for a labeled building. Further calculations suggest that a one dollar saving in energy costs from increased thermal efficiency yields roughly eighteen dollars in the increased valuation of an Energy-Star certified building.

This article compares the level and distribution of the welfare changes from restricting land available for residential development in a city. We compare the economic costs when residential capital is durable with the costs when capital is perfectly malleable and those when population is also freely mobile. Our simulation, based on the stylized specification of an urban location model, suggests that in a more realistic setting with durable capital, the costs of regulation are substantially higher than they are when capital is assumed to be malleable or when households are assumed to be fully mobile. Importantly, the extent of wealth redistribution attributable to these regulations is much larger when these more realistic factors are recognized. When capital is durable, the results also imply that far more new development takes place on previously undeveloped land at the urban boundary, sometimes resulting in an increase in total land under development.