Buying a Home with a Resale Value: Location, Location, Location

Authors


  • *We thank Seppo Honkapohja, Erkki Koskela, Niku Määttänen, François Ortalo-Magné, Sven Rady, Stephen L. Ross, Jouko Vilmunen, Juuso Välimäki, and an anonymous referee for their useful comments and suggestions. Financial support from the Yrjö Jahnsson Foundation and the Research Foundation of the OKO Bank Group is gratefully acknowledged. The usual disclaimer applies.

Abstract

We develop a dynamic multiregion model, where a household's choice of housing location depends on its current wealth and its current type, and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive determines the equilibrium pattern of residential sorting. A strong investment (consumption) motive implies sorting according to household type (wealth). The model predicts that large house-price fluctuations are associated with a low degree of sorting by type. This prediction is consistent with evidence from US metropolitan areas when income, education, and age are used as proxies for household type.

Ancillary