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House Price Fluctuations and Residential Sorting

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Author Info
Markus Haavio (Bank of Finland)
Heikki Kauppi (Department of Economics, University of Turku)
Abstract

Empirical evidence indicates local jurisdictions are internally more heterogeneous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household's location choice depends on its current wealth and its current ``match'' and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the match (wealth). The model predicts a negative relation between the size of house price fluctuations and residential sorting in the match dimension. Also, movers should be more sorted than stayers. These predictions are consistent with evidence from US metropolitan areas when income, age and education are used as proxies for the match.

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Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 48.

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Length: 73
Date of creation: May 2009
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Handle: RePEc:tkk:dpaper:dp48

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Related research
Keywords: residential sorting; house prices; incomplete markets; owner-occupation; household mobility;

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
R13 - Urban, Rural, and Regional Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
R21 - Urban, Rural, and Regional Economics - - Household Analysis - - - Housing Demand
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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