Out‐of‐Town Home Buyers and City Welfare

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.

The impact of international students on housing markets

“…17 A simple standardized regression of the log price change in the 2005-2016 period on the price appreciation between 1998 and 2004 returns a correlation of −0.35, suggesting that local price trends from the housing bubble buildup did not predict a subsequent price movement in the same direction. This is consistent with low frequency mean reversion of house prices, an empirical regularity in housing markets (Glaeser et al 2014).Additional evidence shows that the top decile of college towns experiencing the largest annual price increase during 2005-2016 did not differ systematically from the bottom 10% along several economic indicators (online appendix table F.4).…”

“…This dynamic is somewhat similar to the out-of-town investment model ofFavilukis and Van Nieuwerburgh (2016). In our framework, exogenous demand shocks in college towns are much more concentrated because international students face "prohibitive" commuting costs and pressure rental units only in the city centre.…”

“…Finally, we contribute to numerous studies analyzing immigration and foreign capital inflows on determining real estate prices (Saiz 2003, Saiz 2007, Saiz and Wachter 2011, Badarinza and Ramadorai 2018, Favilukis and Van Nieuwerburgh 2016, Sá 2014) by providing new evidence on the importance of certain migration inflows during economic downturns. With respect to housing markets, the literature tends to find a positive effect on housing costs from immigration at the city or MSA levels, but home value decreases in neighbourhoods where immigrants settle because of native flight.…”

The economic effects of real estate investors

“…Moreover, Agarwal et al (2019), Albanesi et al (2022, Bayer et al (2021), and Ben-David ( 2011) study short-term investors (commonly known as flippers). Chinco and Mayer (2016), Cvijanović and Spaenjers (2021), Davids andGeorg (2020), andFavilukis andVan Nieuwerburgh (2021) analyze foreign and out-of-town investors. We move forward this literature by highlighting the overwhelming increase in the small-and medium-sized and local investors who buy through legal entities, and studying their real effects.…”

The price‐to‐rent ratio: A macroprudential application

“…Other macroprudential policies include tax policies, especially targeted for investors and out-of-town buyers(Somerville et al, 2020;Favilukis & Van Nieuwerburgh, 2017;Han et al, 2021;Hilber & Schöni, 2020), capital requirements for lenders(Hanson et al, 2011;Jiménez et al, 2017), and lending caps targeting other indicators, such as loan-to-income (LTI) or mortgage-to-income (MI) ratios.3 The LTV caps have been both untargeted (Netherlands, seevan Bekkum et al 2019) and targeted. The means of targeting have varied.…”