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Owner-occupied housing as an investment, regional house price cycles and residential sorting

We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupied household’s location choice depends on its current wealth and its current type 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 type (wealth). The model predicts a negative relation between the size of house price fluctuations and the degree of residential sorting in the type dimension. Also, movers should be more sorted than stayers in the type dimension. These predictions are consistent with evidence from US metropolitan areas when income, education and age are used as proxies for household type.

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Paper provided by Bank of Finland in its series Research Discussion Papers with number 24/2011.

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Length: 88 pages
Date of creation: 20 Dec 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_024
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
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  1. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  2. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, vol. 15(2), pages 159-80, October.
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  4. Ferreira, Fernando & Gyourko, Joseph & Tracy, Joseph, 2010. "Housing busts and household mobility," Journal of Urban Economics, Elsevier, vol. 68(1), pages 34-45, July.
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  6. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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  8. Patrick Bayer & Robert McMillan, 2010. "Tiebout Sorting and Neighborhood Stratification," NBER Chapters, in: Fiscal Federalism, pages 1129-1143 National Bureau of Economic Research, Inc.
  9. Dennis Epple & Holger Sieg, 1999. "Estimating Equilibrium Models of Local Jurisdictions," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 645-681, August.
  10. Claessens, Stijn & Kose, Ayhan & Terrones, Marco E, 2008. "What Happens During Recessions, Crunches and Busts?," CEPR Discussion Papers 7085, C.E.P.R. Discussion Papers.
  11. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
  12. Karl E. Case & Christopher J. Mayer, 1995. "Housing Price Dynamics Within a Metropolitan Area," NBER Working Papers 5182, National Bureau of Economic Research, Inc.
  13. Edward L. Glaeser & Joseph Gyourko, 2005. "Urban Decline and Durable Housing," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 345-375, April.
  14. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  15. Eberts, Randall W. & Gronberg, Timothy J., 1981. "Jurisdictional homogeneity and the Tiebout hypothesis," Journal of Urban Economics, Elsevier, vol. 10(2), pages 227-239, September.
  16. Patrick Bayer & Bryan Ellickson & Paul B. Ellickson, 2010. "Dynamic Asset Pricing in a System of Local Housing Markets," American Economic Review, American Economic Association, vol. 100(2), pages 368-72, May.
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