Local market and national components in house price appreciation
We analyze real home price appreciation using a long time series (1971-1989) and large cross section (56 metro areas). Our findings yield important new insights into two outstanding issues in real estate finance an economics. The first deals with the implications for investment opportunities in housing across metro areas. A striking result is that we cannot reject the null hypothesis of equal appreciation rates across locales. A priori, the results are suggestive of equal expected appreciation across the different local markets. However, it is noteworthy that we find significant serial correlation in some local appreciation series. This is consistent with previous findings by Case and Shiller (1989), and suggests that prescient market timers might have been able to make money in selective markets. We then consider the potential implication of equal appreciation rates across cities for housing market equilibrium in light of the fact that price levels do materially differ across metro areas. We argue that equal real appreciation rates starting from different price levels imply increasingly divergent prices of local traits in terms of foregone consumption. Without special assumptions with respect to income and productivity differentials across locations or to local trait income elasticities of demand, the appreciation rates in high housing price level areas ultimately have to fall below those in low price level areas. Preliminary evidence indicates that higher priced areas tend to have significantly lower appreciation rates (controlling for local fixed effects and a common, time-varying effect).
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