Spatial Extrapolation in the Housing Market

83 Pages Posted: 13 Aug 2023 Last revised: 26 Feb 2024

See all articles by Gen Li

Gen Li

University of British Columbia (UBC) - Division of Finance

Date Written: April 30, 2022

Abstract

This paper introduces “spatial extrapolation,” a concept that refers to how economic expectations for one region are formed by extrapolating from the economic outcomes of another geographic area. We demonstrate this unique form of extrapolation by analyzing the purchasing behavior of out-of-town (OOT) homebuyers. Using data from approximately 3 million OOT housing transactions in the U.S. between 2002 and 2017, we find that a 50% increase in five-year hometown house prices leads OOT buyers to pay 2% more for OOT properties. The higher the hometown house price growth, the lower the realized returns and purchase discounts obtained by OOT buyers. To rule out the wealth effect, the paper designs two strategies. First, we classify renters, migrants, and second-home (SH) buyers to control the wealth increase from hometown properties. Second, we estimate geographic heterogeneity in extrapolative beliefs. We find that OOT buyers from higher extrapolation hometowns increase their purchase prices more after the hometown house price growth. Overall, our research highlights the potential spillover effects of extrapolation into other asset markets and provides evidence that extrapolative expectations have broader effects than previously recognized.

Keywords: Extrapolative Belief; Experience Effect; Household Finance; Real Estate, Out-of-town Homebuyers

JEL Classification: G0; G10; G50; G40, R00; R20; R30

Suggested Citation

Li, Gen, Spatial Extrapolation in the Housing Market (April 30, 2022). Available at SSRN: https://ssrn.com/abstract=4536866 or http://dx.doi.org/10.2139/ssrn.4536866

Gen Li (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

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