Abstract
In this paper we provide a statistical test for the presence of a random walk component in house prices. This assumption is widely made when estimating repeat sales price index models. The surprising aspect of the test is that it is based on repeat sales data in which each house is observed to sell only twice. We do not have a time series of data on each house, nor a panel, and thus conventional tests for unit roots do not apply. Despite the fact that we have only two time series observations per house we show that our test, which is easy to apply with available software, has desirable characteristics. When applied to the well known Case and Shiller (1989) [Case, Karl E. and Robert J. Shiller, 1989. The efficiency of the market for single family homes. American Economic Review, 79, 125–137.] data the test reveals no evidence of a random walk component in four large U.S. cities.
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