Do House Price Levels Anticipate Subsequent Price Changes within Metropolitan Areas

This research examines the relationship between hedonically controlled housing price levels and subsequent changes in those prices across locations within MSAs. Our hedonic controls are extensive and so we ask whether between observationally equivalent houses those with higher prices have greater future appreciate. In effect, do areas with a higher price relative to an “imputed rent” get compensated with higher appreciation? In an efficient market, such as postulated by the Gordon Growth Model (GGM), as fundamentals (impute rent) change across locations and over time, the (even imperfect) anticipation of these movements should generate a positive correlation between (residual) price levels and subsequent changes. If there is little or no correlation between (residual) price levels and subsequent changes, we cannot infer much. If there is a negative correlation then it must be the case that the market is simply inefficient. Why would an efficient market generate higher prices for declining fundamentals?We undertake these tests in 4 different MSA using a panel of repeat-sale house price indices at the zip code level – that have been scaled to levels with the hedonic attributes of the house and zip code. In three of these markets we find that identical houses in higher priced zip codes subsequently appreciate faster. In one market we find that there is little statistical difference. In the first three we infer that prices are forward looking, and that buyers who are paying “higher” prices are rewarded by improving fundamentals and subsequent appreciation. In the latter market they are not