Speculators and Middlemen: The Strategy and Performance of Investors in the Housing Market

Abstract

Housing market transactions are a matter of public record and thus provide a rare opportunity to analyze the behavior, performance, and strategies of individual investors. Using data for all housing transactions in the Los Angeles area from 1988-2009, this paper provides empirical evidence on investor behavior that is consistent with several rationales for speculative investment in the finance literature, including the roles of middlemen and na¨ıve speculators. Speculative activity by novice investors increased sharply in the recent housing boom. These investors earned little more than the market rate of appreciation and demonstrated no ability to foresee market price movements.

Keywords: Speculation, Housing Markets, Asset Pricing, Financial Intermediaries, Middlemen, Market Microstructure, Price Volatility, Booms, Busts

JEL Classification: D40, D84, R30