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Presented by Cynthia S. Blasses November 25, 2002

Journal Article Presentation: Shocks and Valuation in the Rental Housing Market Alm, James and Follain, James “Shocks and Valuation in the Rental Housing Market,” Journal of Urban Economics , 36 (September 1994): 117-142. Presented by Cynthia S. Blasses November 25, 2002.

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Presented by Cynthia S. Blasses November 25, 2002

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  1. Journal Article Presentation:Shocks and Valuation in the Rental Housing MarketAlm, James and Follain, James “Shocks and Valuation in the Rental Housing Market,” Journal of Urban Economics, 36 (September 1994): 117-142. Presented by Cynthia S. Blasses November 25, 2002

  2. Introduction and Objectives • Theoretical paper exploring impact of major shocks in the rental housing market • Develops a structural dynamic model of simultaneous equations • demand • supply • construction • asset price

  3. A Perfect Foresight Model • Formulation of expectations • Equations link price with future expected rents • Manipulating the equations- • Future values are eliminated using only current & lagged values of rent & price • Pt represents the present value of actual future path of rents

  4. Model Equations Rt = a0 + a1Kt + a2Yt (Demand) Parameters a0 , a2 > 0 , Parameter a1 < 0 Kt = (1-d)Kt-1+ Ct (Supply) Ct = α(Pt - P*) (Construction) (Price)

  5. The Solution • To solve this system of linear simultaneous difference equations, Alm and Follain develop a second-order difference equation E = Rt + D1Rt-1 + D2Rt-2 Where it is assumed that Yt = Yt-1 = Yt-2 = YT

  6. Where the particular solution represents a steady state value for rent And the characteristic roots (b1, b2) determine the dynamic behavior of rent over time.

  7. Adjustment Paths • The adjustment path of rent depends on b1 & b2 • The path oscillates over time D1>0, D2<0 • Convergence to steady-state requires b1 & b2 to be less than one in absolute value • Speed of adjustment is affected by many factors • in general, the smaller the characteristic roots, the faster the market converges to equilibrium

  8. Concluding Recommendations • Additional structure • Demand & construction equations derived from intertemporal utility and profit maximization • Alternative expectations models should be explored • Specifically, a Rational Expectations Model • Actual estimation of one or more of the equations presented • Econometric estimations of model parameters

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