The dynamics of house price responsiveness and locational sorting: Evidence from air quality changes

• Instrumental Variables, panel data approach using American Housing Survey
• Owner-occupied units capitalize changes immediately, but rent price response lags
• Dynamic pattern of price response coincides with evidence of sorting

Despite extensive use of housing data to reveal valuation of non-market goods, the process of house price adjustment remains vague. Using the restricted access American Housing Survey, a high-frequency panel of prices, turnover, and occupant characteristics, this paper examines the time path of prices and preference-based sorting in response to air quality changes caused by differential regulatory pressure from the 1990 Clean Air Act Amendments. The results suggest that owner-occupied units capitalize changes quickly, whereas rent prices lag behind amenity levels. The delayed but sharp rent response temporally coincides with evidence of sorting, indicating a strong link between location choices and price dynamics.