The Short- and Long-Term Effects of Remote Work on U.S. Housing Markets – Economic Innovation Group

The rapid growth of remote work has brought about a variety of economic changes, with notable impacts on the housing market. Emerging literature suggests remote work has changed both where people live and how much housing they demand. A period of acute housing market scarcity marked by rapid growth in house prices and rents has raised concerns about the impact of remote working on housing affordability. In a new white paper from the Economic Innovation Group (EIG), economists Greg Howard, Jack Liebersohn and Adam Ozimek examine the likely long-term effects of remote working on housing markets. The results suggest that rents will fall significantly over the long term as housing supply has time to meet rising demand. Additionally, remote work shifting demand to housing markets where supply is more responsive will cause rents to fall more significantly than would otherwise have occurred.

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Summary

The sudden increase in remote work has caused dramatic changes in the housing market in the United States between 2020 and 2022. Recent research has shown that remote work increases the demand for housing (Behrens, Kichko and Thisse, 2021 Mondragon and Wieland, 2022); flattened gradients of intra-urban housing prices (Brueckner, Kahn and Lin, 2021; Ramani and Bloom, 2021); and reallocated demand between cities (Delventhal and Parkhomenko, 2020; Mondragon and Wieland, 2022). During this period, real rents increased by 8% and real house prices increased by more than 20%. Short-term housing supply is highly inelastic, so it is only natural that rapid increases in demand have driven rents and prices up; however, the long-term effects of remote work on the housing market could be very different from those that occur during a time when there are few opportunities for housing construction.

This article investigates the long-term effects of remote work on housing affordability and inflation, which we argue are likely to be different from short-term changes. We examine two ways in which remote work could alter housing demand: First, demand moves away from the central business districts of large cities, where housing supply is inelastic. As demand falls in areas where housing supply is inelastic and rises in areas where supply is elastic, housing costs fall on average. Second, remote work increases the demand for space because people use home offices and spend more time at home (Stanton and Tiwari, 2021). This force increases the cost of housing in the short and long term, with the long-term effects depending on the average elasticity of long-term housing supply.

We investigate the net effect of these forces using a model of the US housing market designed to capture short- and long-term housing demand, as well as differences in the elasticity of short-term housing supply. and long term.

The net effect of remote work on housing costs is the sum of the effects caused by housing demand and location demand. Taken together, the long-term effect on real rents will be about two-fifths of the short-term effect. Our results also have implications for the housing component of the consumer price index (CPI). We calculate the effect on the housing component of the CPI by considering the implications of the model for rents, the area that is measured for the CPI. We find that the effect of location demand on CPI counties is about -2 percentage points.

The structure of the model allows us to easily calculate the long-term effects of remote work in a variety of possible scenarios. First, we consider alternative hypotheses regarding the effects of remote work on housing demand. Second, we consider different hypotheses about the future of remote work. Since the location demand channel scales linearly with shock size, an increase in remote work will increase the location demand channel proportionally to our baseline estimate. Finally, we examine other hypotheses about how remote work might affect where people decide to move.