House price dynamics with dispersed information (Q2434354)

``The goal of this paper is to propose an extension of the standard user cost model to rationalize the heterogeneous behavior of housing prices in the US.'' The proposed model describes an economy with an infinite set of agents that live for two periods. In the first period, agents supply labor and make savings and housing decisions. In the second period, they consume the return on savings and housing. Individual wages are represented via stochastic exponential processes the exponents of which are sums of economy incomes and individual-specific wage shocks which are different random variables having normal distribution. The economy incomes are described by a linear recurrent process with an additive normal noise. Agents have preferences over housing services and second-period consumption which are represented via logarithmic utility functions (Cobb-Douglas type) with stochastic coefficients. In the first period, having the realization of income, agents decide how many housing units to buy at the given price, they also choose the quantity of housing services to consume, and the units to rent out at the given rental price. The prices, interest rate and decision quantities define the agents' resource constraints. Also there are short-selling constraints on housing. The constraints and the utility functions define housing demand consisting of intertemporal quantities of housing units and the units to rent. Optimality conditions of the utility maximization are derived and investigated. The authors derive the main model's predictions when information is imperfect and dispersed, and agents use the equilibrium price to infer the unknown state of the economy. Using a large panel of US cities, they find that house prices are higher and more volatile in cities where the proxy of information dispersion introduced by the authors is higher.