The Housing Supply Chain and the Elasticity of Housing Supply

Why is housing supply inelastic with respect to price? In this paper, we abstract away from arguments related to slow and restrictive regulation of land to address how frictions and market power in the housing supply chain reduce the elasticity of housing supply. Our approach is theoretical, and we derive housing supply elasticities under various assumptions on the links between the supply chain tiers and market power. We show that even within a rather simple supply chain of three tiers, the supply elasticity is quite complex and highly context-specific. Frictions in the flows between tiers impose costs and market power induces mark-ups, leading to low quantities of housing supplied and a less elastic housing supply. Lastly, the paper studies how shocks to housing demand may impact the housing market equilibrium very differently depending on the housing supply chain elasticity, incorporating frictions and market power across the supply chain.