CURA Awards Travel Grant to Jing Song

CURA has awarded Jing Song, PhD candidate in the Department of Economics, a travel grant to present "House Price Dynamics" at the 2013 North American Meetings of the Regional Science Association International in Atlanta this November.
Abstract:
This paper develops and estimates a model that explains several house price phenomena. The first one is a “stationarity-puzzle”: real house prices are trend stationary while real income, one of the most important factors identified in the literature as a determinant of real house prices, contains a unit root. Therefore, the challenge for a coherent house price model is to combine the different stationarity properties of house prices and income. Another phenomenon that has not been well explained in the literature is the short-run positive serial correlation (positive one-year autoregressive coefficient) and long-run mean reversion (negative five-year autoregressive coefficient) of house price changes. This paper modifies the dynamic spatial equilibrium model in Glaeser et al. (2012) by assuming a unit root process for income and considers both rational expectations and adaptive expectations to explain the above phenomena. I solve the model under both rational expectations and adaptive expectations. Separating Metropolitan Statistical Areas into a coastal group and an inland group, I estimate the model’s parameters. Next, house price series are simulated and the autoregressive coefficients of one-year and five-year changes as well as the unit root test statistic are calculated. The model with adaptive expectations fits the empirical features better than the one that assumes rational expectations: it generates positive one-year autoregressive coefficient, negative five-year autoregressive coefficient, and the unit root test rejects a unit root.