The Economic Impact of Reducing On-Base Naval Housing

GEORGE TOLLEY [*] This article develops a methodology for estimating the impact on rents and home prices from a hypothetical reduction of on-base naval housing from 56 naval bases in the United States. Based on data from the Center for Naval Analyses and the U.S. Census of Housing, and response coefficients from housing economics literature, illustrative estimates are presented of the short-run and long-run impact of reducing naval housing. Key factors determining the increase in rents and home prices include (1) the increase in demand for housing in the private sector resulting from the reduction of on-base naval housing, (2) the short-run and long-run elasticities of supply of private sector housing with respect to housing prices, and (3) the elasticity of demand to live in a defined housing area with respect to housing prices. We find that the effects on rents and home prices are in most cases small in the short run and negligible in the long run. The median first-year rent increase in the 53 counties is estimated to be 0.90%, with only 9 of the counties expected to experience increases of as much as 4%. Rents are found to decline over time as the initial increase in demand encourages new development of private sector housing. Within S years, the median rent increase is expected to be only 0.33%, with only two counties still expected to experience rent increases of as much as 4%. In the long run, the median rent increase is estimated to be only 0.10%. Because the purchase of a home is a long-term investment, we find that the impact on home prices is negligible, similar to the long-run impact on rents. (JEL R31) I. INTRODUCTION A reduction of on-base naval housing will lead to an increase in demand for housing in the private market surrounding the base. The first of two supply responses to this increased demand is an increase in the proportion of existing housing units that are occupied, accomplished through a reduction in the housing vacancy rate. The second response is an increase in the stock of housing, accomplished primarily through new construction. The first response-the increase in the occupancy rate-occurs immediately, while the second response--the increase in the housing stock--occurs over a longer period of time. In this article, we analyze the effects of a reduction in on-base naval housing on rents charged for rental housing and prices paid for owner-occupied housing in the areas surrounding naval bases. In section II, a model of the supply and demand is presented first for rental housing and second for owner-occupied housing. Methodologies are developed for estimating changes in rents and home prices. Drawing on the housing economics literature, section III presents estimates of the response coefficients needed to estimate effects on rents and home prices over time. Section IV presents illustrative calculations suggesting the order of magnitude of the effects of reducing on-base naval housing. They provide a basis for more refined estimation not attempted here. A review of main findings is presented in section V. II. DESCRIPTION OF A RENTAL HOUSING MARKET A. Rental Demand and Supply The demand for rental housing in an area can be defined as the number of people willing and able to pay a given amount of rent for an apartment. In the present study, the area of concern is the area within commuting distance of a naval base. If demand increases in this market area, more rental units will be occupied, but rent increases will occur, consistent with the basic law of consumer demand. The area within commuting distance of a naval base will contain many apartments differing by size, number of bedrooms and bathrooms, amenities such as air conditioning or modern kitchens, immediate surroundings, nearness to shopping, transportation, schools, and many other features. For the sake of simplicity, the many differences between types of units are not explicitly considered. …