The Role of Price Spillovers in the American Housing Boom

One of the striking features of the last U.S. housing boom was the heterogeneity in the timing of its onset across local markets. In this paper, we exploit this heterogeneity to estimate the extent to which the boom was spread via spatial spillovers from one market to another. Our analysis focuses on spillovers that occur around the time that a local market enters its boom, which we identify using sharp structural breaks in house price growth rates. On the extensive margin, there is evidence that the likelihood of a market booming increases substantially if nearby neighbors boom. On the intensive margin, we also find statistically significant but economically modest effects of the size of a neighbor’s boom on subsequent price growth in nearby markets. These affects appear to be unrelated to local market fundamentals, suggesting a potential role for non-rational factors.