On the Relation between Local Amenities and House Price Dynamics

This study explores the extent to which local amenities (quality of life and trade-productivity) are related to house price volatility, returns, and risk-adjusted returns across 238 MSAs from 1975 to 2013. We find strong and unambiguous evidence that high amenity areas experience greater price volatility. In regards to returns, high amenity areas experience greater (lower) real returns in appreciating (depreciating) markets. However, high amenity areas experience little to no abnormal risk-adjusted returns, on average. Results from the study are robust to an endogenous treatment of amenities and land supply elasticity within a GMM framework. Overall, we conclude that the desirability of a metropolitan area from the perspective of both homeowners and firms is a significant channel through which land values drive house price dynamics