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Anderson Graduate School of Management– Finance

UCLA

Title:Local Market and National Components in House Price Appreciation

Author:Gyourko, Joseph, The Wharton School, University of Pennsylvania, and Visiting AssociateProfessor at the Anderson School of ManagementVoith, Richard, Federal Reserve bank of Pennsylvania and Visiting Assistant Professor at TheWharton School

Publication Date:11-01-1990

Series:Recent Work

Permalink:http://escholarship.org/uc/item/1z6959pf

Abstract:We analyze real home price appreciation using a long time series (1971-1989) and large crosssection (56 metro areas). Our findings yield important new insights into two outstanding issues inreal estate finance an economics. The first deals with the implications for investment opportunitiesin housing across metro areas. A striking result is that we cannot reject the null hypothesis ofequal appreciation rates across locales. A priori, the results are suggestive of equal expectedappreciation across the different local markets. However, it is noteworthy that we find significantserial correlation in some local appreciation series. This is consistent with previous findings byCase and Shiller (1989), and suggests that prescient market timers might have been able to makemoney in selective markets.

We then consider the potential implication of equal appreciation rates across cities for housingmarket equilibrium in light of the fact that price levels do materially differ across metro areas.We argue that equal real appreciation rates starting from different price levels imply increasinglydivergent prices of local traits in terms of foregone consumption. Without special assumptions withrespect to income and productivity differentials across locations or to local trait income elasticitiesof demand, the appreciation rates in high housing price level areas ultimately have to fall belowthose in low price level areas. Preliminary evidence indicates that higher priced areas tend tohave significantly lower appreciation rates (controlling for local fixed effects and a common, time-varying effect).

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