The Role of Price Spillovers in the American Housing Boom

Abstract

This paper investigates whether price spillovers across metropolitan areas were an important factor in the spreading of the last housing boom. We estimate the magnitude of those spillovers by measuring price changes in a focal market following positive shocks to neighboring markets. To identify shocks to neighboring markets, we exploit sharp structural breaks in house price growth rates. There is strong evidence of spillovers following such shocks. These effects arise mostly from very close neighbors and imply an elasticity of focal market price changes to nearest neighbor price changes of 0.15-0.33. Changes in local fundamentals cannot explain these spillovers.