Speculators and price overreaction in the housing market

Abstract

This paper investigates the role of speculators in the housing market, specifically their contribution to price overreaction through positive feedback trading (or momentum trading). We exploit a unique data set of condominium transactions in a residential real estate market where transaction traits associated with short-term speculation can be identified. In the cross-section of housing projects, a 10-percentage-point increase in trading activity following a strong short-run market price rise predicts a negative subsequent monthly price change of 0.5% at the project level. Moreover, the price reversal effect associated with the momentum trading by short-term speculators is two to three times stronger, and holding such trading constant, momentum trading in general has little additional impact. Our findings further suggest that momentum trading by short-term speculators contributes to price overreaction largely in submarkets with lower information efficiency.