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Arbitrage in Housing Markets

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  • Glaeser, Edward L.

    (Harvard U)

  • Gyourko, Joseph

    (U of Pennsylvania)

Abstract

Urban economists understand housing prices with a spatial equilibrium approach that assumes people must be indifferent across locations. Since the spatial no arbitrage condition is inherently imprecise, other economists have turned to different no arbitrage conditions, such as the prediction that individuals must be indifferent between owning and renting. This paper argues the predictions from these non-spatial, financial no arbitrage conditions are also quite imprecise. Owned homes are extremely different from rental units and owners are quite different from renters. The unobserved costs of home owning such as maintenance are also quite large. Furthermore, risk aversion and the high volatility of housing prices compromise short-term attempts to arbitrage by delaying home buying. We conclude that housing cannot be understood with a narrowly financial approach that ignores space any more than it can be understood with a narrowly spatial approach that ignores asset markets.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp08-017.

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Date of creation: Mar 2008
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Handle: RePEc:ecl:harjfk:rwp08-017

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  1. Karl E. Case & Robert J. Shiller, 1990. "Forecasting Prices and Excess Returns in the Housing Market," NBER Working Papers 3368, National Bureau of Economic Research, Inc.
  2. Jonathan McCarthy & Richard W. Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Dec, pages 1-17.
  3. Karl E. Case & Robert J. Shiller, 1987. "Prices of Single Family Homes Since 1970: New Indexes for Four Cities," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 851, Cowles Foundation for Research in Economics, Yale University.
  4. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 98-113, March.
  5. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(2), pages 763-789, May.
  6. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 729-52, November.
  7. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 35-55, March.
  8. Joseph Gyourko & Joseph Tracy, 2003. "Using home maintenance and repairs to smooth variable earnings," Staff Reports, Federal Reserve Bank of New York 168, Federal Reserve Bank of New York.
  9. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  10. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 125-37, March.
  11. Joseph Gyourko & Christopher Mayer & Todd Sinai, 2013. "Superstar Cities," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 5(4), pages 167-99, November.
  12. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 421-36, June.
  13. Edward L. Glaeser & Joseph Gyourko, 2006. "Housing Dynamics," NBER Working Papers 12787, National Bureau of Economic Research, Inc.
  14. Todd Sinai, 1997. "Taxation, User Cost, and Household Mobility Decisions," Zell/Lurie Center Working Papers 303, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  15. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1257-78, December.
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Cited by:
  1. Jinjarak, Yothin & Sheffrin, Steven M., 2011. "Causality, real estate prices, and the current account," Journal of Macroeconomics, Elsevier, Elsevier, vol. 33(2), pages 233-246, June.
  2. Christophe André & Luis A. Gil-Alana & Rangan Gupta, 2014. "Testing for persistence in housing price-to-income and price-to-rent ratios in 16 OECD countries," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 46(18), pages 2127-2138, June.
  3. Elias Oikarinen, 2008. "Empirical application of the housing-market no-arbitrage condition: problems, solutions and a Finnish case study," Discussion Papers, Aboa Centre for Economics 39, Aboa Centre for Economics.
  4. Banzhaf, H. Spencer & Farooque, Omar, 2013. "Interjurisdictional housing prices and spatial amenities: Which measures of housing prices reflect local public goods?," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 43(4), pages 635-648.
  5. Glaeser, Edward & Saiz, Albert & Gyourko, Joseph, 2008. "Housing Supply and Housing Bubbles," Scholarly Articles 2962640, Harvard University Department of Economics.
  6. Goswami, Gautam & Tan, Sinan, 2012. "Pricing the US residential asset through the rent flow: A cross-sectional study," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(10), pages 2742-2756.
  7. McDuff, DeForest, 2011. "Demand substitution across US cities: Observable similarity and home price correlation," Journal of Urban Economics, Elsevier, vol. 70(1), pages 1-14, July.
  8. Oliver Bischoff, 2010. "Explaining Regional Variation in Equilibrium Real Estate Prices and Income," Working Papers 036, Chair for Economic Policy, University of Hamburg.
  9. Gao, Andre & Lin, Zhenguo & Na, Carrie Fangzhou, 2009. "Housing market dynamics: Evidence of mean reversion and downward rigidity," Journal of Housing Economics, Elsevier, Elsevier, vol. 18(3), pages 256-266, September.
  10. Hjalmarsson, Erik & Hjalmarsson, Randi, 2009. "Efficiency in housing markets: Which home buyers know how to discount?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(11), pages 2150-2163, November.
  11. Grainger, Corbett A., 2012. "The distributional effects of pollution regulations: Do renters fully pay for cleaner air?," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 840-852.
  12. Fernando Ferreira & Joseph Gyourko, 2011. "Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and Metropolitan Areas, 1993-2009," NBER Working Papers 17374, National Bureau of Economic Research, Inc.
  13. Alex Chinco & Christopher Mayer, 2014. "Misinformed Speculators and Mispricing in the Housing Market," NBER Working Papers 19817, National Bureau of Economic Research, Inc.
  14. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.

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