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US House Price Bubbles and Busts

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  • James R. Follain
  • Seth H. Giertz

Abstract

We use data for a large panel of US Metropolitan Statistical Areas (US MSAs) in order to assess the ex ante likelihood of house price bubbles. We employ a vector error correction–based model in order to project house prices under different scenarios. Projected house price (and employment) distributions are generated for each MSA. The model’s predictions are compared to actual outcomes—focusing primarily on the house price bubble and bust of the Great Recession. In applying these results to local governments, we document a substantial rise in property tax rates during the recent crisis. Results from this exercise suggest that interactions between the property tax and house price fluctuations may have exacerbated the bubble and bust. More generally, our analysis underscores the complexity of forecasting bubbles and cautions against attempting to do so using the notion of a national housing market. Even in recent years, housing markets are heavily influenced by local supply and demand conditions.

Suggested Citation

  • James R. Follain & Seth H. Giertz, 2016. "US House Price Bubbles and Busts," Public Finance Review, , vol. 44(1), pages 132-159, January.
    • Handle: RePEc:sae:pubfin:v:44:y:2016:i:1:p:132-159
    DOI: 10.1177/1091142114537674
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    References listed on IDEAS

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    1. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123, Central Bank of Chile.
    2. Alm, James & Buschman, Robert D. & Sjoquist, David L., 2011. "Rethinking local government reliance on the property tax," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 320-331, July.
    3. Lutz, Byron & Molloy, Raven & Shan, Hui, 2011. "The housing crisis and state and local government tax revenue: Five channels," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 306-319, July.
    4. Giertz, J. Fred, 2006. "The Property Tax Bound," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(3), pages 695-705, September.
    5. Lutz, Byron F., 2008. "The Connection Between House Price Appreciation and Property Tax Revenues," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(3), pages 555-572, September.
    6. Goodman, Allen C. & Thibodeau, Thomas G., 2008. "Where are the speculative bubbles in US housing markets?," Journal of Housing Economics, Elsevier, vol. 17(2), pages 117-137, June.
    7. Follain, James R. & Giertz, Seth H., 2011. "Using Monte Carlo simulations to establish a new house price stress test," Journal of Housing Economics, Elsevier, vol. 20(2), pages 101-119, June.
    8. William Dudley, 2010. "Asset bubbles and the implications for central bank policy," Speech 21, Federal Reserve Bank of New York.
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    Cited by:

    1. Robert M. Dunsky & James R. Follain & Seth H. Giertz, 2021. "Pricing Credit Risk for Mortgages: Credit Risk Spreads and Heterogeneity across Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 997-1032, September.
    2. Balcilar, Mehmet & Gupta, Rangan & Sousa, Ricardo M. & Wohar, Mark E., 2021. "Linking U.S. State-level housing market returns, and the consumption-(Dis)Aggregate wealth ratio," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 779-810.

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