House price fluctuations and residential sorting

Empirical evidence indicates local jurisdictions are internally more heterogenous than standard sorting models predict. We develop a dynamic multi-region model, with fluctuating regional house prices, where an owner-occupying household's location choice depends on its current wealth and its current "match" and involves both consumption and investment considerations. The relative strength of the consumption motive and the investment motive in location choice determines the equilibrium pattern of residential sorting, with a strong investment (consumption) motive implying sorting according to the match (wealth). The model predicts a negative relation between house price fluctuations and residential sorting in the match dimension. Also, movers should be more sorted than stayers. Using age, education and income as proxies for the match, we test these predictions with US data, and find support for our theory