When Real Estate is the Only Game in Town
Singapore Management University
Harrison G. Hong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
Jeffrey D. Kubik
Syracuse University - Department of Economics
Jeffrey P. Thompson
Federal Reserve Board; University of Massachusetts Amherst
July 24, 2015
We show that the well-documented local bias of investors is helpful for understanding investment home purchases and house price fluctuations. Households living in high FICO (prime) zip codes within a Metropolitan Statistical Area (MSA) are less likely to own investment homes nearby and more likely to own stocks than their low FICO (subprime) counterparts. But in MSAs with few publicly traded firms headquartered there, even households in prime zip codes tilt their portfolios toward investment homes. Our only-game-in-town effect helps explain a previously puzzling aspect of the recent US Housing Crisis, namely why large MSAs like Phoenix and Las Vegas, even with high housing supply elasticities, nonetheless experienced significant price fluctuations.
Number of Pages in PDF File: 56
Keywords: Investment Homes, Local Bias, US Housing Crisis
JEL Classification: G1, G11
Date posted: December 31, 2013 ; Last revised: August 5, 2015
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