Owner-Occupied Housing as an Investment, Regional House Price Cycles and Residential Sorting

Abstract

We develop a dynamic multi-region model, with ‡uctuating regional house prices, where an owner-occupied household's location choice 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 in the location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the type (wealth). The model predicts a negative relation between the size of house price ‡uctuations and the degree of residential sorting in the type dimension. Also, movers should be more sorted than stayers in the type dimension. These predictions are consistent with evidence from US metropolitan areas when income, education and age are used as proxies for household type.

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

“…Therefore, residential sorting and house‐price volatility appear to be (negatively) correlated, even if we partial out the applied covariates. While the benchmark measure of house‐price volatility is used in the regressions of Table , the results reported by Haavio and Kauppi () show that the findings are robust to the choice of volatility measure (filter, average amplitude, maximum amplitude). Furthermore, qualitatively similar results are obtained when the volatility measures are computed using the subsample 1975–1990.…”

“…As a further robustness check, we have also computed the volatility measures using the subsample 1975–1990, preceding our cross‐section. Also, these measures of the sizes of house‐price fluctuations are negatively correlated with all the sorting measures ( D , , T ) for income, age, and education (see Haavio and Kauppi, ).…”

“…(iii) Borrowing constraints might narrow the set of feasible housing options, and impair a household's ability to move. In Haavio and Kauppi (, section 2.1), we have discussed the empirical evidence that motivates the basic assumptions of the model.…”

“…Combining equations and yields The household's wealth position ( n ) changes if and only if the household makes a capital gain or suffers a capital loss in the housing market. This stark way of modelling wealth dynamics is motivated by the observation that wealth shocks realized in the housing market can be remarkably large compared with typical household incomes and savings (see Haavio and Kauppi, , section 2.1, for some evidence and discussion). If, prior to the regional shock, the household owned a property in a then unpopular location (), the household makes a capital gain and climbs one rung in the wealth ladder; if the house was in an expensive area () before the change of fortunes, the household suffers a loss and falls one rung down.…”

“…Furthermore, qualitatively similar results are obtained when the volatility measures are computed using the subsample 1975–1990. Haavio and Kauppi () have also discussed the interpretation of the estimated coefficients of the covariates in selected regressions.…”