Shift in House Price Estimates during COVID-19 Reveals Effect of Crisis on Collective Speculation

We exploit a timely city-level panel of individual house price estimates for both small and big real-estate markets in California USA to estimate the impact of COVID-19 on the housing market. Descriptive analysis of spot house price estimates, including contemporaneous price uncertainty and 30-day price change for individual properties listed on the online real-estate platform Zillow.com, together facilitate quantifying both the excess valuation and valuation confidence attributable to this global socio-economic shock. Our quasi-experimental pre-/post-COVID-19 design spans several years around 2020 and leverages contemporaneous price estimates of rental properties – i.e., real estate entering the habitation market, just not for purchase and hence free of speculation – as an appropriate counterfactual to properties listed for sale. Combining unit-level matching and difference-in-difference approaches, we estimate that properties listed for sale after the pandemic featured an excess monthly price growth of roughly 1 percentage points, corresponding to an excess annual price growth of roughly 12.7 percentage points, which accounts for more than half of the annual growth observed across those regions in 2021. Simultaneously, uncertainty in price estimates decreased, signaling the irrational confidence characteristic of prior asset bubbles. We explore how these two trends are related to market size, local market supply and borrowing costs, which altogether lend support for the counter-intuitive roles of uncertainty and interruptions in decision-making.