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Endogenous housing market cycles

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  • Sommervoll, Dag Einar
  • Borgersen, Trond-Arne
  • Wennemo, Tom
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    Abstract

    Housing markets tend to display positive serial correlation as well as considerable volatility over time. We present a heterogeneous agent model illustrating the connection between adaptive expectations and housing market fluctuations. A dwelling serves as a shelter, as a vehicle for investment and as mortgage collateral. Interesting dynamics arise as the valuation of these three properties changes over time through the interaction of buyers, sellers and mortgagees. In the absence of credit constraints imposed by mortgagees, house prices oscillate mildly around the equilibrium price. However, credit constraints imposed by mortgagees can affect market dynamics quite dramatically with periods of mild oscillations interrupted by violent collapses. This chaotic behavior arises even though buyers, sellers and mortgagees agree on market forecasts.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 3 (March)
    Pages: 557-567

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:3:p:557-567

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Heterogeneous agents Adaptive expectations Credit evaluation models House price cycles;

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    Cited by:
    1. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(1), pages 2-16.
    2. Costello, Greg & Fraser, Patricia & Groenewold, Nicolaas, 2011. "House prices, non-fundamental components and interstate spillovers: The Australian experience," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(3), pages 653-669, March.
    3. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2010. "Housing, consumption and monetary policy: how different are the US and the euro area?," Working Paper Series, European Central Bank 1161, European Central Bank.
    4. Dieci, Roberto & Westerhoff, Frank, 2009. "A simple model of a speculative housing market," BERG Working Paper Series 62, Bamberg University, Bamberg Economic Research Group.
    5. MeiChi Huang, 2013. "The Role of People’s Expectation in the Recent US Housing Boom and Bust," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(3), pages 452-479, April.
    6. Rötheli, Tobias F., 2012. "Boundedly rational banks’ contribution to the credit cycle," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 41(5), pages 730-737.
    7. Gimeno, Ricardo & Martí­nez-Carrascal, Carmen, 2010. "The relationship between house prices and house purchase loans: The Spanish case," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(8), pages 1849-1855, August.
    8. Hott, C., 2011. "Lending behavior and real estate prices," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(9), pages 2429-2442, September.
    9. Meichi Huang, 2013. "Housing bubble implications: The perspective of housing price predictability," Economics Bulletin, AccessEcon, vol. 33(1), pages 586-596.
    10. Goswami, Gautam & Tan, Sinan, 2012. "Pricing the US residential asset through the rent flow: A cross-sectional study," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(10), pages 2742-2756.
    11. Eli Beracha & Hilla Skiba, 2013. "Findings from a Cross-Sectional Housing Risk-Factor Model," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 47(2), pages 289-309, August.
    12. Niinimäki, J.-P., 2011. "Nominal and true cost of loan collateral," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(10), pages 2782-2790, October.

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