Veblen Effect in the United States Housing Market: Spatial and Temporal Variation

The finance literature suggests that the Veblen effect (i.e. luxury consumption behavior) could be translated into consumers' behavior with other goods and assets. This study is the first to examine the role that the Veblen effect plays in housing market dynamics, with a focus on spatial and temporal variation in this role. It uses a unique dataset that matches the consumers' appetite for non-housing luxury goods from Google Insights for Search to the premium that they pay for high-end houses in US Metropolitan Statistical Areas (MSAs) during 2004-2011. The results demonstrate that controlling for other MSA demographic and economic characteristics, the Veblen effect has a significant, positive relationship with a premium paid in the housing market. This suggests that high-end houses may have been purchased for the enjoyment of signaling wealth and status and this housing consumption behavior may have partly driven the large deviation of high-end house prices from the median. Housing consumption tends to be motivated more by the Veblen effect in the areas where people pay a steady, higher premium than in other areas with a more volatile, lower premium. In fact, the higher Veblen effect substantially contributes to maintaining the higher level of the premium in these areas even during the bust period.