House Price Dynamics and Dispersed Information

We use a user-cost model to study how dispersed information among housing marketparticipants a¤ects the equilibrium house price. In the model, agents are disparatelyinformed about local economic conditions, consume housing services, and speculate onprice changes. Information dispersion leads agents to have heterogeneous expectationsabout housing demand and prices. Optimists, who expect high house price growth,buy in anticipation of capital gains; pessimists, who expect capital losses, prefer torent. As pessimistic expectations are not incorporated in the price of owned houses, theequilibrium price is higher and more volatile relative to the benchmark case of commoninformation. Using the dispersion of within city income as a proxy of informationdispersion of local economic conditions, we present evidence supporting the model'spredictions in a panel of US cities.[...]