Imperfect Information and Investor Inferences from Housing Price Dynamics

Abstract

We examine characteristics of housing price dynamics that may be consistent with rational learning and not simply irrational feedback trading. We find significant patterns of temporal and spatial diffusion that are more amenable to explanations that allow for rational components. First, the tests were executed not simply on housing price changes, but also on town-by-town differentials from regional average price changes. Second, significant relationships with own and neighboring town differentials were found, but not with control groups of non-neighboring towns. Third, population density, a proxy for scale economies in information production, accelerates the diffusion process. Tests were performed on quarterly data for large samples from Connecticut and the San Francisco area, employing the method of moments estimators.

JEL Classification: G13