Rushing into the American Dream? House Prices Growth and the Timing of Homeownership

Abstract

We use the New York Fed Consumer Credit Panel dataset to empirically examine how past house price growth influences the timing of homeownership. We find that the median individual in metropolitan areas with the highest quartile house price growth becomes a homeowner 5 years earlier than that in areas with the lowest quartile house price growth. The result is consistent with a life-cycle housing-demand model in which high past price growth increases expectations of future price growth thus accelerating home purchases at young ages. We show that extrapolative expectations formed by home-buyers are a necessary channel to explain the result.

Keywords: Housing, Homeownership, Consumer Finance, Credit Constraints, Life Cycle

JEL Classification: R21, D12, D91, D14