Buying a Home with a Resale Value: Location, Location, Location*

Abstract

We develop a dynamic multiregion model, where a household's choice of housing location 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 determines the equilibrium pattern of residential sorting. A strong investment (consumption) motive implies sorting according to household type (wealth). The model predicts that large house-price fluctuations are associated with a low degree of sorting by type. This prediction is consistent with evidence from US metropolitan areas when income, education, and age are used as proxies for household type.