Abstract
This paper asks whether speculative house-price pressure in an economic center can spill into related housing markets. In other words, are bubbles contagious? I develop a theoretical model that allows for speculative price appreciation to spread from one market to another. I estimate an error-correction model using quarterly housing data for Las Vegas and Los Angeles and fundamental market variables from 1978 Quarter 2 through 2008 Quarter 1. Las Vegas prices show significant persistence and adjust slowly to disequilibrium. Contagious price and income growth from the Los Angeles market sustained by naïve expectations contributed to the bubble that formed in Las Vegas. (JEL C32, R21)
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