Housing Market Dynamics

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Ohio
Hosted By: Society for Economic Dynamics
  • Chair: Johannes Stroebel, New York University

Speculative Dynamics of Prices and Volume

Charles Nathanson
,
Northwestern University
Anthony A. DeFusco
,
Northwestern University
Eric Zwick
,
University of Chicago

Abstract

We present a dynamic theory of prices and volume in asset bubbles. In our framework, predictable price increases endogenously attract short-term investors more strongly than long-term investors. Short-term investors amplify volume by selling more frequently, and they destabilize prices through positive feedback. Our model predicts a lead-lag relationship between volume and prices that we confirm in the 2000-2008 US housing bubble. Using data on 50 million home sales from this episode, we document that much of the variation in volume arose from the rise and fall in short-term investment.

Social Dynamics in Housing Markets

Johannes Stroebel
,
New York University
Rachel Cao
,
Harvard University
Theresa Kuchler
,
New York University
Michael Bailey
,
Facebook

Abstract

We document that the recent house price experiences within an individual's social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new and scalable methodology to document large effects of perceptions about the attractiveness of property investments on individual and aggregate housing market outcomes. This methodology exploits plausibly-exogenous variation in the recent house price experiences of individuals' geographically-distant friends as shifters of those individuals' local housing market perceptions. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, and (iii) pay 3.3 percent more for a given house. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. A lower dispersion of friends' house price experiences has a similarly positive effect on housing market investments as higher average experiences. We also find that, at the county level, the across-population mean and dispersion of friends' house price experiences affect aggregate house prices and trading volume.

Out-of-town Home Buyers and City Welfare

Stijn Van Nieuwerburgh
,
New York University
Jack Favilukis
,
University of British Columbia

Abstract

The major cities of the world have attracted a flurry of interest from out-of-town (OOT) home buyers. Such capital inflows in local real estate have implications for affordability through their effects on prices and rents, but also for construction, local labor markets, the spatial distribution of residents, and ultimately economic welfare. We develop a spatial equilibrium model of a city that features heterogeneous households that make optimal decisions on consumption, savings, labor supply, tenure status, and location. The model generates realistic wealth accumulation and home ownership patterns over the life-cycle and in the cross-section. An inflow of OOT real estate buyers pushes up prices, rents, and wages. It increases the concentration of young, high-productivity, and wealthy households in the city center (gentrification). When OOT investors buy 10\% of the housing stock, city welfare goes down by 0.3\% of permanent consumption levels. The average renter suffers a much larger loss while the average owner gains. When we extend and calibrate our model to the New York metropolitan area, the average household experiences a much smaller 0.01\% lifetime consumption equivalent loss from foreigners buying Manhattan real estate, because displaced households are able to move to other parts of the NYC metro area.

Economic Consequences of Housing Speculation

Wei Xiong
,
Princeton University
Zhenyu Gao
,
Chinese University of Hong Kong
Michael Sockin
,
University of Texas-Austin

Abstract

By exploiting variation in capital gains taxation across U.S. states as an instrument, we provide novel evidence that housing speculation during the boom period of 2004 to 2006, measured by the fraction of non-owner-occupied home purchases, helps to explain not only the severity of the housing price bust in 2007 to 2009, but also the depth of the subsequent economic recession. Housing speculation, anchored, in part, on extrapolation of past housing price changes, was more pronounced in zip codes with low capital gains taxation. Zip codes that had greater speculation, in turn, experienced more new housing construction during the boom, and more severe declines in employment, per capita income, real payroll, and new business establishment growth during the bust. Our analysis also indicates that supply overhang and local household demand are two key channels for transmitting the adverse effects of housing speculation.
JEL Classifications
  • R2 - Household Analysis
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location