Abstract
This paper uses two similar local jurisdiction merger policies at different phases of a housing cycle to examine whether home purchasers form their expectations of future house prices based on lagged price changes. Using a detailed housing transaction data set, we find that, during the boom period, the relative home prices in the merged area increased significantly for a few months after a positive fundamental shock and then reverted. However, during the bust period, we find no overreaction of the relative house prices in the local merged districts after a similar shock. Moreover, we find that short-term speculators may be the main contributor to the housing price overreaction. Overall, our results confirm the role of over-extrapolation in house price dynamics.
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