"Distant Speculators and Asset Bubbles in the Housing Market"
Publication type: Working paper
We investigate the role of out of town second house buyers (so-called "distant speculators") in bubble formation during the recent housing boom. Distant speculators are likely to have an excessive reliance on capital gains for financial returns and be less informed about local market conditions much like noise traders in many financial models. Using transactions level data that allows us to identify the address of the property owner, we show that increases in purchases by distant speculators (but not local speculators) are strongly correlated with high house price appreciation rates and log implied to actual rent ratios — a proxy for mispricing in the housing market. We develop a simple model that helps us address the issue of reverse causality and separate out circumstances when out of town second house buyers are simply responding to unobserved changes in home values and when they help cause house price appreciation rates and log implied to actual rent ratios to rise. Consistent with the model, we show that the size of the investment market that out of town second house buyers come from is positively related to the impact of distant speculators from that MSA on house price appreciation rates and log implied to actual rent ratios in the target MSA. We conclude by showing the large impact that distant speculators have on the local economy, with out of town second house purchases representing as much as 5% of total output in Las Vegas during the boom.
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