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Understanding booms and busts in housing markets

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  • Craig Burnside
  • Martin Eichenbaum
  • Sergio Rebelo

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 consistent with these observations. Real estate agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics." Agents meet randomly with one another. Those with tighter priors are more likely to convert others 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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File URL: http://www.frbatlanta.org/documents/cqer/publicationscq/cqerwp/cqer_wp1202.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series CQER Working Paper with number 2012-02.

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Date of creation: 2012
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Handle: RePEc:fip:fedacq:2012-02

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  1. 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.
  2. Monika Piazzesi & Martin Schneider, 2009. "Momentum Traders in the Housing Market: Survey Evidence and a Search Model," American Economic Review, American Economic Association, vol. 99(2), pages 406-11, May.
  3. Sendhil Mullainathan & Andrei Shleifer, 2002. "Media Bias," NBER Working Papers 9295, National Bureau of Economic Research, Inc.
  4. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  5. Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2007. "Learning and Disagreement in an Uncertain World," Carlo Alberto Notebooks 48, Collegio Carlo Alberto.
  6. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Urban Growth and Housing Supply," NBER Working Papers 11097, National Bureau of Economic Research, Inc.
  7. 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.
  8. Quigley, John M. & Raphael, Steven, 2006. "Regulation and the High Cost of Housing in California," Berkeley Program on Housing and Urban Policy, Working Paper Series qt3hh7s35m, Berkeley Program on Housing and Urban Policy.
  9. 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.
  10. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
  11. 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.
  12. Matthew Gentzkow & Jesse M. Shapiro, 2010. "Ideological Segregation Online and Offline," NBER Working Papers 15916, National Bureau of Economic Research, Inc.
  13. 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.
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