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House price fluctuations and residential sorting

Author

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  • Markus Haavio

    () (Department of Economics Helsinki School of Economics)

  • Heikki Kauppi

Abstract

Empirical evidence indicates local jurisdictions are internally more heterogenous 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 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 house price fluctuations and residential sorting in the match dimension. Also, movers should be more sorted than stayers. Using age, education and income as proxies for the match, we test these predictions with US data, and find support for our theory

Suggested Citation

  • Markus Haavio & Heikki Kauppi, 2006. "House price fluctuations and residential sorting," 2006 Meeting Papers 774, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:774
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    More about this item

    Keywords

    house prices; residential sorting; incomplete markets;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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