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House price fluctuations and residential sorting

Markus Haavio and Heikki Kauppi

No 774, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Empirical evidence indicates local jurisdictions are internally more heterogenous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household's location choice depends on its current wealth and its current "match" and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the match (wealth). The model predicts a negative relation between house price fluctuations and residential sorting in the match dimension. Also, movers should be more sorted than stayers. Using age, education and income as proxies for the match, we test these predictions with US data, and find support for our theory

Keywords: house prices; residential sorting; incomplete markets (search for similar items in EconPapers)
JEL-codes: D52 R13 R21 (search for similar items in EconPapers)
Date: 2006-12-03
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Working Paper: House Price Fluctuations and Residential Sorting (2009) Downloads
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More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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