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Flips, flops and foreclosures: anatomy of a real estate bubble

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Author Info

  • Craig A. Depken II
  • Harris Hollans
  • Steve Swidler

Abstract

Purpose – This paper aims to examine the anatomy of a real estate bubble. In the process, the paper identifies three phases of the market's evolution: flips, flops and foreclosures. An examination of the Las Vegas real estate market illustrates the three phases. Design/methodology/approach – The paper examines transaction data from the metropolitan Las Vegas area (Clark County) from 1994 to 2009. The first part of the analysis identifies the three phases of the bubble and is descriptive in nature. This is followed by more formal tests of Granger causality. Findings – In the early part of the sample, a large percentage of transactions are speculative or “flips” causing prices to rapidly increase. Eventually, flipping loses its profitability and over the last three years, there is an increasing number of foreclosures leading to falling prices. The descriptive analysis of the Las Vegas market is augmented with causality tests which show that prices were the driving force behind all three phases in the market's evolution. Research limitations/implications – Future research might focus on underlying structural inter-temporal relationships to augment the Granger causality tests. Practical implications – Analysis shows that price is the driving force behind a bubble and that loan modification programs alone will not solve the current housing crisis. Social implications – Government entities might expand neighborhood stabilization programs to affect both demand and supply of homes. Moreover, it might be prudent to include information related to flipping on multiple listing service agreements. Additionally, local governments should be consistent in their record keeping. Originality/value – To the best of the authors' knowledge, this is the first paper to examine the housing bubble using an extensive set of transaction data.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 3 (2011)
Issue (Month): 1 (February)
Pages: 49-65

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Handle: RePEc:eme:jfeppp:v:3:y:2011:i:1:p:49-65

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Related research

Keywords: Mortgage companies; Mortgage default; Real estate; United States of America;

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References

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  1. Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
  2. Brueckner, Jan K., 1980. "A vintage model of urban growth," Journal of Urban Economics, Elsevier, vol. 8(3), pages 389-402, November.
  3. Karl Case & John Quigley, 2008. "How Housing Booms Unwind: Income Effects, Wealth Effects, and Feedbacks through Financial Markets," European Journal of Housing Policy, Taylor and Francis Journals, vol. 8(2), pages 161-180.
  4. Craig Depken & Harris Hollans & Steve Swidler, 2009. "An Empirical Analysis of Residential Property Flipping," The Journal of Real Estate Finance and Economics, Springer, vol. 39(3), pages 248-263, October.
  5. Zhenguo Lin & Eric Rosenblatt & Vincent Yao, 2009. "Spillover Effects of Foreclosures on Neighborhood Property Values," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 387-407, May.
  6. Steven D. Levitt & Chad Syverson, 2005. "Market Distortions when Agents are Better Informed: The Value of Information in Real Estate Transactions," NBER Working Papers 11053, National Bureau of Economic Research, Inc.
  7. Neil Bhutta & Jane Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series 2010-35, Board of Governors of the Federal Reserve System (U.S.).
  8. Shiller Robert J., 2009. "Unlearned Lessons from the Housing Bubble," The Economists' Voice, De Gruyter, vol. 6(7), pages 1-2, July.
  9. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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