House Price Momentum and Strategic Complementarity

Abstract

House prices exhibit substantially more momentum, positive autocorrelation in price changes over two to three years, than existing theories can explain. This paper introduces, empirically grounds, and quantitatively analyzes an amplification mechanism for momentum that can reconcile theory with the data. Sellers have an incentive not to set a unilaterally high or low list price because the demand curve they face is concave in relative price: increasing the list price of an above-averaged priced house rapidly reduces its probability of sale, while cutting the price of a below-average-priced home reduces revenue but only slightly improves its chance of selling. The resulting strategic complementarity amplifies frictions that generate sluggish price adjustment because sellers adjust their price gradually to stay near the average. I provide new micro-empirical evidence that the demand curve faced by sellers is concave and show using a search model calibrated to the micro evidence that concave demand amplifies momentum by a factor of two to three.

Expectations with Endogenous Information Acquisition: An Experimental Investigation

“…The weight on the displayed information is an increasing function of the perceived precision of the selected information source and the attention allocated to the displayed information. 38 The posterior variance of the fundamental is…”

Getting on and Moving Up the Property Ladder: Real Hedging in the U.S. Housing Market Before and After the Crisis

“…Using quarterly data from Hong Kong, Fu and Ng (2001) finds that momentum is due to slow response of house prices to new information. More recently, using data from San Francisco, Los Angeles, and San Diego over the [2008][2009][2010][2011][2012][2013] time period, Guren (2018) shows that momentum can be explained by the strategic behavior of sellers who find it optimal to set asking prices close to the existing average market price. Chauvet et al (2016) estimate autoregressive models using monthly returns over the same time period, yet include a larger number of metropolitan areas.…”

“…3 Building on these results, more recent studies examined potential gains of momentum investment strategies in real estate assets (Beracha and Skiba, 2011;Guren, 2018).…”

House Prices and Consumption Inequality

“…See, for example, Ortalo‐Magné and Rady () and references therein. More recently, Guren () provides a model of house price momentum.…”

“…17 See, for example, Ortalo-Magné and Rady (2006) and references therein. More recently,Guren (2018) provides a model of house price momentum.18 Again,Campbell and Cocco (2007) andAttanasio et al (2009) are examples in the U.K. setting.19 Of course, the truth of this statement depends on the correlation of house price shocks with other features of the distribution. Heterogeneous house price shocks would increase consumption inequality if, for example, they are unforecastable from current information and hence uncorrelated with income and wealth.…”