Research Discussion Papers, Bank of Finland
House price fluctuations and residential sorting
() and Heikki Kauppi
Abstract: Empirical evidence suggests that local jurisdictions are
internally more heterogeneous 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 weights of the consumption and
investment motives in the location choice determine the equilibrium pattern
of residential sorting, with a strong investment (consumption) motive
implying sorting according to match (wealth). The model predicts a negative
relation between size of house price fluctuations and residential sorting
in the match dimension. Also movers should be more sorted than stayers.
These predictions are consistent with evidence from US metropolitan areas
when income, age and education are used as proxies for the match.
Keywords: residential sorting; house prices; incomplete markets; owner-occupation; household mobility; (follow links to similar papers)
JEL-Codes: D31; D52; R13; R21; R23; (follow links to similar papers)
56 pages, June 10, 2009
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