Speculators and Price Overreaction in the Housing Market

type="main"> This paper investigates the role of speculators in the housing market, specifically their contribution to price overreaction through positive feedback trading (or momentum trading). We exploit a unique data set of condominium transactions in a residential real estate market where transaction traits associated with short-term speculation can be identified. In the cross-section of housing projects, a 10-percentage-point increase in trading activity following a strong short-run market price rise predicts a negative subsequent monthly price change of 0.5% at the project level. Moreover, the price reversal effect associated with the momentum trading by short-term speculators is two to three times stronger, and holding such trading constant, momentum trading in general has little additional impact. Our findings further suggest that momentum trading by short-term speculators contributes to price overreaction largely in submarkets with lower information efficiency.