Local House Price Diffusion

Abstract

This paper investigates house price diffusion over time and space at the CBSA-, town-, and census tract-level. We estimate fixed effects models of growth rates on lagged growth rates (persistence effects), lagged growth rates from nearby jurisdictions (spillover effects) and growth rates in fundamentals. The estimated persistence and spillover effects are positive and significant at the CBSA-level. We find large ripple (contagion) effects that may have contributed to the recent housing downturn that reached the national-level. When estimating town-level diffusion, we find little evidence of persistence or spillover effects. Hence price diffusion appears to be stronger across than within housing markets. Fundamentals do not appear to be the main drivers of price diffusion which leaves room for housing bubbles based on households’ over-optimism about future house prices.