A model of price swings in the housing market
AbstractIn this paper we use a standard neoclassical model supplemented by some frictions to understand large price swings in the housing market. We construct a two good general equilibrium model in which housing is a composite good produced using structures and land. We revisit the connection between changes in interest rates, credit conditions as measured by maximum loan-to-value ratios and expectations in influencing housing prices in a setting in which the stock of housing can be used as collateral for borrowing and credit markets are segmented. We find that changes in interest rates and credit conditions can generate significant price swings. Under rational expectations (perfect foresight) our model is able to explain 50% of the recent movements in U.S. house prices. When we allow shocks to expectations, the model’s ability to match the evidence increases significantly. Contrary to conventional wisdom, we show that standard asset pricing formulas seem to correctly describe the behavior of house prices if the appropriate pricing kernel is used.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-022.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-DGE-2012-08-23 (Dynamic General Equilibrium)
- NEP-URE-2012-08-23 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Klaus Adam & Pei Kuang & Albert Marcet, 2012.
"House Price Booms and the Current Account,"
NBER Macroeconomics Annual,
University of Chicago Press, vol. 26(1), pages 77 - 122.
- Klaus Adam & Pei Kuang & Albert Marcet, 2011. "House Price Booms and the Current Account," CEP Discussion Papers dp1064, Centre for Economic Performance, LSE.
- Klaus Adam & Pei Kuang & Albert Marcet, 2011. "House Price Booms and the Current Account," NBER Working Papers 17224, National Bureau of Economic Research, Inc.
- Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, 03.
- Davis, Morris & Heathcote, Jonathan, 2001.
"Housing and the Business Cycle,"
01-09, Duke University, Department of Economics.
- Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
- Morris A. Davis & Jonathan Heathcote, 2005. "Housing And The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 751-784, 08.
- Mary C. Daly & Bart Hobijn, 2013. "Downward nominal wage rigidities bend the Phillips curve," Working Paper Series 2013-08, Federal Reserve Bank of San Francisco.
- Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2013.
"Household leveraging and deleveraging,"
602, Federal Reserve Bank of New York.
- Michele Boldrin & Carlos Garriga & Adrian Peralta-Alva & Juan M. Sánchez, 2013. "Reconstructing the great recession," Working Papers 2013-006, Federal Reserve Bank of St. Louis.
- Narayan Bulusu & Jefferson Duarte & Carles Vergara-Alert, 2013. "Booms and Busts in House Prices Explained by Constraints in Housing Supply," Working Papers 13-18, Bank of Canada.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.