Short-Term Buyers and Housing Market Dynamics

This study demonstrates that taking into account heterogeneous investment horizons will improve our understanding of housing price and trading dynamics. Using an OLG (Overlapping Generations) model in which agents have heterogeneous preferences and investment horizons, with transaction costs, short term investors are more sensitive to changes in economic fundamentals and are less likely to own (and trade) in a declining market. The model predicts that the ownership composition contains information about current and future house prices and trading dynamics. Empirically, we find that home owners’ expected holding horizons co-vary negatively with house prices, and they also predict future (short term) returns.