| Commutes and Home Price |
| Written by Bill Russell | |||||||||||||||||||||||||||||||||||||||||||
| 07.13.2007 | |||||||||||||||||||||||||||||||||||||||||||
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Discuss this article on the forums. (0 posts) An interesting aspect to housing economics is the spatial component to home prices. Most economic models of cities assume that jobs cluster in urban areas and that households cluster around those jobs. While researching this assumption, I found an explanation for why people cluster into cities in a fascinating 1994 paper by Glaser and Mare.  Glaser and Mare reported that people who live in and around cities with a population of more than ½ million earn 32% more than people who do not. Yet this premium cannot be explained by reasoning that firms have to pay urban employees more to be able to afford to live in pricy cities. The reality is that worker productivity must justify the higher wage or else employers would just seek out lower wages in other cities. Urban workers must be more productive than non-urban workers. In fact, Glaser and Mare report that the wage premium only appears gradually for those who move to cities, and that it stays with workers after they move away from cities, suggesting the wage premium comes about from some sort of learning that occurs in cities.If workers move to cities to gain skills and get high paying jobs, all things being equal, they must place a premium on living near those jobs and avoiding long commutes. In fact, it is possible to put a value on those commute minutes by looking at the relationship between commute time and home prices. The chart below shows the top 20 cities in terms of the additional home price paid per minute of commute saved. As you can see, those cities with the biggest premiums are those infamous for having terrible traffic.
In summary, cities are attractive because they offer good jobs, durable training, and high wages. All the households who are attracted to cities cause traffic congestion and long commutes. Households then bid up home prices near the jobs in order to avoid long commutes, generally resulting in suburbs with lower prices but longer commutes. You can track commute times and how an individual MSA’s average commute time compares to other MSAs in the HousingIntelligence Market Dashboard Reports.
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