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The Role of Price Spillovers in the American Housing Boom

Abstract

One of the striking features of the last U.S. housing boom was the heterogeneity in the timing of its onset across local markets. In this paper, we exploit this heterogeneity to estimate the extent to which the boom was spread via spatial spillovers from one market to another. Our analysis focuses on spillovers that occur around the time that a local market enters its boom, which we identify using sharp structural breaks in house price growth rates. There is no evidence of spillovers on the extensive margin; the probability that a given market enters a housing boom this period is unrelated to whether or not its neighboring markets have recently begun to boom. We do, however, find statistically significant evidence of modest price spillovers on the intensive margin. Prices in a given local market jump 0.8 percent in the year that its geographically closest neighboring market enters a housing boom and remain close to 1 percent higher for several years thereafter. These effects appear to be unrelated to local market fundamentals, suggesting a potential role for non-rational factors. While statistically robust, this impact is not economically large compared to the size of the typical price boom.

Type

Working Paper

Author(s)

Anthony DeFusco, Wenjie Ding, Fernando Ferreria, Joseph Gyourko

Date Published

2017

Citations

DeFusco, Anthony, Wenjie Ding, Fernando Ferreria, and Joseph Gyourko. 2017. The Role of Price Spillovers in the American Housing Boom.

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