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Understanding Booms and Busts in Housing Markets

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  • Burnside, Craig
  • Eichenbaum, Martin
  • Rebelo, Sérgio

Abstract

Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model that is consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics". Agents meet randomly and those with tighter priors are more likely to convert other agents to their beliefs. The model generates a "fad": the fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate boom-busts or protracted booms.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8232.

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Date of creation: Feb 2011
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Handle: RePEc:cpr:ceprdp:8232

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Keywords: housing prices; real estate;

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References

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  1. Sendhil Mullainathan & Andrei Shleifer, 2002. "Media Bias," Harvard Institute of Economic Research Working Papers 1981, Harvard - Institute of Economic Research.
  2. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
  3. John M. Quigley & Steven Raphael, 2005. "Regulation and the High Cost of Housing in California," American Economic Review, American Economic Association, vol. 95(2), pages 323-328, May.
  4. Monika Piazzesi & Martin Schneider, 2009. "Momentum traders in the housing market: survey evidence and a search model," NBER Working Papers 14669, National Bureau of Economic Research, Inc.
  5. Brent W. Ambrose & Piet Eichholtz & Thies Lindenthal, 2013. "House Prices and Fundamentals: 355 Years of Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 477-491, 03.
  6. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
  7. Edward L. Glaeser & Joseph Gyourko, 2006. "Housing Dynamics," NBER Working Papers 12787, National Bureau of Economic Research, Inc.
  8. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Urban Growth and Housing Supply," Harvard Institute of Economic Research Working Papers 2062, Harvard - Institute of Economic Research.
  9. Matthew Gentzkow & Jesse M. Shapiro, 2010. "Ideological Segregation Online and Offline," NBER Working Papers 15916, National Bureau of Economic Research, Inc.
  10. Atif Mian & Amir Sufi, 2010. "The Great Recession: Lessons from Microeconomic Data," American Economic Review, American Economic Association, vol. 100(2), pages 51-56, May.
  11. Sendhil Mullainathan & Andrei Shleifer, 2005. "The Market for News," American Economic Review, American Economic Association, vol. 95(4), pages 1031-1053, September.
  12. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Why Have Housing Prices Gone Up?," Harvard Institute of Economic Research Working Papers 2061, Harvard - Institute of Economic Research.
  13. Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2007. "Learning and Disagreement in an Uncertain World," Carlo Alberto Notebooks 48, Collegio Carlo Alberto.
  14. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
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