The major boom and bust over the 2000s has drawn attention to the volatility of the UShousing market and its implications for the broader economy. While the national scopeof this most recent cycle was unusual, metropolitan and regional housing markets, as wellthose of smaller countries, exhibit cyclical behavior on a very regular basis.
Booms and bustsgenerally occur over protracted periods of time and are characterized by large ﬂuctuationsin price, transaction volume, and time-to-sell.While these facts about housing cycles are well-established, explanations for their size andduration are not as obvious. Several studies have shown that movements in fundamentals likeincome, wages, and rents are not large enough to explain the observed ﬂuctuations in houseprices (see Head et al.  and Case and Shiller ). Excess housing price volatility isperhaps even more puzzling when one considers that a large fraction of transactions consist of homeowners moving within a metro area. Even if aggregate volatility is driven by ﬂuctuationsin external demand – from new migrants or ﬁrst-time home buyers – one might expect thesupply and demand for housing by “internal movers” selling one house and buying anotherat about the same time to be less sensitive to the price level and, therefore, a stabilizingforce on the local market. Yet, in this paper, we will argue that the timing of the buying andselling decisions of these internal movers has exactly the opposite eﬀect, greatly amplifyingprice ﬂuctuations over the cycle rather than smoothing them.We begin the paper by using detailed records on the universe of transactions in the LosAngeles metropolitan area from 1992-2008 to establish a series of new empirical facts aboutthe nature of housing transactions over the cycle. Following homeowners as they buy and sellhouses, we ﬁrst show that internal transaction volume is incredibly volatile and indeed muchmore pro-cyclical than external volume.
In particular, internal transaction volume at thepeak of the boom in 2003-2005 is three times greater than in the preceding trough in 1993and four times greater than in the subsequent trough in 2008, while external transactionvolume varies in a much more narrow band. As a result, the fraction of homes sold by
See Burnside et al.  for empirical evidence.
An internal transaction is deﬁned as one in which the seller buys another property within the metroarea. An external transaction is deﬁned as one in which the seller does not.