House Price Contagion and US City Migration Networks

Gregor Schubert

Why do national trends in house prices spread more to some cities than to others? This paper proposes an explanation of house price contagion based on migration spillovers between US cities: Increases in house prices as a result of local economic shocks and housing supply constraints drive out-migration to other cities. These migration flows are more likely to affect cities with stronger pre-existing migration links to the origin cities, and increase house prices at these destinations. Gregor Schubert uses the network structure of inter-city migration to develop an instrument for identifying causal spillover effects between cities: he finds that an increase in other cities’ house prices by 10% in the long run causes a 6.3% house price move in a city exposed to the shock through migration links. Migration spillovers from the effect of interest rate declines on house prices in other cities can explain 32% of the cross-sectional variation in house price growth during the run-up to the housing boom of the 2000s. To quantify the effect of changes in migration costs and housing supply constraints on these house price spillovers, Schubert develops and estimate a dynamic spatial equilibrium model that incorporates forward-looking migration choices. After estimating this model with US data, he shows that lower migration costs substantially reduce the dispersion in house price growth: without worker mobility, the spread in house price growth across cities in response to wage shocks would be 65-70% larger. Moreover, declines in worker mobility increase the impact of housing policy on the distribution of house price growth across cities.