Housing prices and commuting time.?

Question

Anyone who has ever lived in or near a large city knows that, other things being equal, the price of a house is inversely related to the length of the commute from the house to the central business district. In the Virginia suburbs of Washington, D.C., for example, a simple three-bedroom house could sell for $700,000 if it were located within walking distance of the Metro in Arlington, 15 minutes from downtown. Half an hour out, in Fairfax, the same house might go for $550,000. An hour out, in Leesburg, the identical house might go for under $400,000. Assume that the cost of constructing the house is the same in all three locations. Using concepts discussed in this chapter explain the observed relationship between location and price.

Answer 1

Hmm well the closer the house is to the city, the more expensive it is.  I think the cause of that would be high demand for houses/other forms of housing nearby the city.  People want to be close to where they work.  Since Washington DC has a lot of people who are employed in the government and/or just happen to work in businesses in there, there are a lot of people who live close to DC or within DC.  That's what causes prices to be so high.  There is high demand for houses that are in DC or close to it.  Yet the farther away housing is, there is less demand.  With less demand, prices aren't that high.  When there is high demand, its difficult...(sometimes) prices will go up due to that.  I hope I helped you...I used my knowledge of micro to help ya.

Answer 2

People value their time spent commuting  approximately like their hourly wage raised to 1.5 power so when they choose a place to live this "cost" is taken into account along with the actual money cost of commuting.  The higher the wage the greater the implied cost of time spent commuting so  in general higher income people will out bid  someone with less income for convenient locations because time has a greater  dollar value to high income earners. This effect is combined with the desire to live in neighborhoods with neighborhood average income greater than of equal to your income accounts for the income stratification of neighborhoods as well as housing prices.  Usually the  effect of  average income of a neighborhood is greater than the commuting time so low income neighborhoods can persist in central cities but as congestion  increases we see commuting time begin to dominate and the "gentrification  of previously poor  neighborhoods in many of the larger cities.