Spatial Extrapolation in Housing Markets

Individuals form economic expectations for a given region by extrapolating from the economic outcomes of another geographic area, a phenomenon we term 'spatial extrapolation.' We exploit the scenario when Out-of-town (OOT) buyers purchase property in places different from their previous residences. Analyzing roughly 3 million U.S. housing transactions by OOT homebuyers from 2002 to 2017, we find that one standard deviation (42%) increase in hometown house prices over the past five years induces OOT buyers to pay an additional 1.5% for new OOT properties. To control for potential wealth effects, we classify buyers as renters, migrators, or second-home buyers. Our findings indicate that wealth effects alone are insufficient to interpret the purchasing patterns. Importantly, we establish a novel connection between OOT buyers' beliefs and purchase behavior: those from regions with high extrapolative tendencies are willing to pay more than their counterparts from low extrapolation areas, given the same increase in hometown house prices. Our research pioneers the exploration of spatial extrapolation and sheds light on the intricate interplay between homebuyer beliefs and behaviors, emphasizing the profound influence of extrapolative belief on local housing market dynamics