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Out-of-town Home Buyers and City Welfare

Author

Listed:
  • Stijn Van Nieuwerburgh

    (New York University)

  • Jack Favilukis

    (University of British Columbia)

Abstract

The major cities of the world have attracted a flurry of interest from out-of-town (OOT) home buyers. Such capital inflows in local real estate have implications for affordability through their effects on prices and rents, but also for construction, local labor markets, the spatial distribution of residents, and ultimately economic welfare. We develop a spatial equilibrium model of a city that features heterogeneous households that make optimal decisions on consumption, savings, labor supply, tenure status, and location. The model generates realistic wealth accumulation and home ownership patterns over the life-cycle and in the cross-section. An inflow of OOT real estate buyers pushes up prices, rents, and wages. It increases the concentration of young, high-productivity, and wealthy households in the city center (gentrification). When OOT investors buy 10% of the housing stock, city welfare goes down by 0.3% of permanent consumption levels. The average renter suffers a large welfare loss while the average owner gains modestly. We adapt the model to the New York metro area, obtain detailed data on OOT purchases, and find that the observed increase in OOT purchases is associated with a 0.1% welfare loss.

Suggested Citation

  • Stijn Van Nieuwerburgh & Jack Favilukis, 2017. "Out-of-town Home Buyers and City Welfare," 2017 Meeting Papers 486, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:486
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    References listed on IDEAS

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    1. Esteban Rossi-Hansberg & Pierre-Daniel Sarte & Raymond Owens, 2010. "Housing Externalities," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 485-535, June.
    2. Jan Eeckhout & Roberto Pinheiro & Kurt Schmidheiny, 2014. "Spatial Sorting," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 554-620.
    3. Francisco Gomes & Alexander Michaelides, 2008. "Asset Pricing with Limited Risk Sharing and Heterogeneous Agents," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 415-448, January.
    4. Anthony A. DeFusco & Charles G. Nathanson & Eric Zwick, 2017. "Speculative Dynamics of Prices and Volume," NBER Working Papers 23449, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Hilber, Christian A.L. & Schöni, Olivier, 2020. "On the economic impacts of constraining second home investments," Journal of Urban Economics, Elsevier, vol. 118(C).
    2. Badarinza, Cristian & Ramadorai, Tarun & Shimizu, Chihiro, 2019. "Gravity, Counterparties, and Foreign Investment," CEPR Discussion Papers 13491, C.E.P.R. Discussion Papers.
    3. Somerville, Tsur & Wang, Long & Yang, Yang, 2020. "Using purchase restrictions to cool housing markets: A within-market analysis," Journal of Urban Economics, Elsevier, vol. 115(C).
    4. Kilian, Lutz & Zhou, Xiaoqing, 2018. "The propagation of regional shocks in housing markets: Evidence from oil price shocks in Canada," CFS Working Paper Series 606, Center for Financial Studies (CFS).
    5. Bednarek, Peter & Ma, Chang & Rebucci, Alessandro & Te Kaat, Daniel Marcel, 2019. "Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms," CEPR Discussion Papers 14187, C.E.P.R. Discussion Papers.
    6. Jonathan Bourne, 2019. "Empty homes: mapping the extent and value of low-use domestic property in England and Wales," Palgrave Communications, Palgrave Macmillan, vol. 5(1), pages 1-14, December.
    7. Zhimin Li & Leslie Sheng Shen & Calvin Zhang, 2020. "Capital Flows, Asset Prices, and the Real Economy: A "China Shock" in the U.S. Real Estate Market," International Finance Discussion Papers 1286, Board of Governors of the Federal Reserve System (U.S.).
    8. Albert Solé-Ollé & Elisabet Viladecans-Marsal & José Mª Durán-Cabré & Thomas Davidoff & Mariona Segú, 2018. "Tourism and Gentrification in Global Cities: Could Fiscal Policy be Useful? / Turismo y gentrificación en ciudades globales: ¿podría ser útil la política fiscal? / Turisme i gentrificació en ciutats g," IEB Reports ieb_report_2_2018, Institut d'Economia de Barcelona (IEB).
    9. Pangallo, Marco & Nadal, Jean-Pierre & Vignes, Annick, 2019. "Residential income segregation: A behavioral model of the housing market," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 15-35.
    10. Damien Puy & Anil Ari & Yu Shi, 2020. "Foreign Demand and Local House Prices: Evidence from the US," IMF Working Papers 2020/043, International Monetary Fund.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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