House price dynamics with dispersed information

We use a user-cost model to study how dispersed information among housing market participants a¤ects the equilibrium house price. In the model, agents consume housing services, speculate on price changes and are disparately informed about local economic conditions. Information dispersion leads agent to form heterogeneous expectations about housing demand and prices. Optimists, who expect high house price growth, buy in anticipation of capital gains, while pessimists prefer to rent housing units to avoid capital losses. The upshot is that pessimistic expectations are not incorporated in the price of owned houses and, thus, the equilibrium price is higher relative to the benchmark case of common information. We test the predictions of the model on US cities, using the dispersion of city income as a proxy for the dispersion of information of local economic condition. The empirical evidence supports the prediction that house prices are higher and more volatile in cities where information is more dispersed. JEL Classi…cation Numbers: R21, R23, G10