IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/23030.html
   My bibliography  Save this paper

Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market

Author

Listed:
  • Charles G. Nathanson
  • Eric Zwick

Abstract

This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner-occupancy. As a result, undeveloped land both facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation reverses the standard intuition that cities where construction is easier experience smaller house price booms. It also explains why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply.

Suggested Citation

  • Charles G. Nathanson & Eric Zwick, 2017. "Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market," NBER Working Papers 23030, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23030
    Note: AP CF EFG ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w23030.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Karl E. Case & Robert J. Shiller & Anne K. Thompson, 2012. "What Have They Been Thinking? Homebuyer Behavior in Hot and Cold Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 265-315.
    2. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, June.
    3. Glaeser, Edward L. & Kahn, Matthew E., 2004. "Sprawl and urban growth," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 56, pages 2481-2527, Elsevier.
    4. Guerrieri, Veronica & Hartley, Daniel & Hurst, Erik, 2013. "Endogenous gentrification and housing price dynamics," Journal of Public Economics, Elsevier, vol. 100(C), pages 45-60.
    5. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2016. "No‐Bubble Condition: Model‐Free Tests in Housing Markets," Econometrica, Econometric Society, vol. 84, pages 1047-1091, May.
    6. DeFusco, Anthony A. & Nathanson, Charles G. & Zwick, Eric, 2022. "Speculative dynamics of prices and volume," Journal of Financial Economics, Elsevier, vol. 146(1), pages 205-229.
    7. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis," NBER Working Papers 18082, National Bureau of Economic Research, Inc.
    8. Hanushek, Eric A & Quigley, John M, 1980. "What Is the Price Elasticity of Housing Demand?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 449-454, August.
    9. Patrick Bayer & Christopher Geissler & Kyle Mangum & James W Roberts & Andrew Karolyi, 2020. "Speculators and Middlemen: The Strategy and Performance of Investors in the Housing Market," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 5212-5247.
    10. Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1753-1797.
    11. Edward L. Glaeser, 2013. "A Nation of Gamblers: Real Estate Speculation and American History," American Economic Review, American Economic Association, vol. 103(3), pages 1-42, May.
    12. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1449-1496.
    13. 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 406-411, May.
    14. Favara, Giovanni & Song, Zheng, 2014. "House price dynamics with dispersed information," Journal of Economic Theory, Elsevier, vol. 149(C), pages 350-382.
    15. Grenadier, Steven R, 1996. "The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-1679, December.
    16. Edward L. Glaeser, 2013. "A Nation Of Gamblers: Real Estate Speculation And American History," NBER Working Papers 18825, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jung Sakong, 2021. "Effect of Ownership Composition on Property Prices and Rents: Evidence from Chinese Investment Boom in US Housing Markets," Working Paper Series WP-2021-12, Federal Reserve Bank of Chicago.
    2. Zhenyu Gao & Michael Sockin & Wei Xiong, 2019. "Economic Consequences of Housing Speculation," NBER Working Papers 26457, National Bureau of Economic Research, Inc.
    3. Glaeser, Edward L. & Nathanson, Charles G., 2017. "An extrapolative model of house price dynamics," Journal of Financial Economics, Elsevier, vol. 126(1), pages 147-170.
    4. DeFusco, Anthony A. & Nathanson, Charles G. & Zwick, Eric, 2022. "Speculative dynamics of prices and volume," Journal of Financial Economics, Elsevier, vol. 146(1), pages 205-229.
    5. Greg Kaplan & Kurt Mitman & Giovanni L. Violante, 2020. "The Housing Boom and Bust: Model Meets Evidence," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3285-3345.
    6. Weicheng Lian, 2019. "Fundamental and Speculative Demands for Housing," IMF Working Papers 2019/063, International Monetary Fund.
    7. Lauren Lambie‐Hanson & Wenli Li & Michael Slonkosky, 2022. "Real estate investors and the U.S. housing recovery," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(6), pages 1425-1461, November.
    8. Eileen van Straelen, 2021. "Desperate House Sellers: Distress Among Developers," Finance and Economics Discussion Series 2021-065, Board of Governors of the Federal Reserve System (U.S.).
    9. Zhenxi Chen & Cuntong Wang, 2020. "Speculative trading in Chinese housing market: a panel regression method," Applied Economics, Taylor & Francis Journals, vol. 52(38), pages 4186-4195, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhenyu Gao & Michael Sockin & Wei Xiong, 2020. "Learning about the Neighborhood," NBER Working Papers 26907, National Bureau of Economic Research, Inc.
    2. DeFusco, Anthony A. & Nathanson, Charles G. & Zwick, Eric, 2022. "Speculative dynamics of prices and volume," Journal of Financial Economics, Elsevier, vol. 146(1), pages 205-229.
    3. Glaeser, Edward L. & Nathanson, Charles G., 2015. "Housing Bubbles," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 701-751, Elsevier.
    4. Edward L. Glaeser & Charles G. Nathanson, 2014. "Housing Bubbles," NBER Working Papers 20426, National Bureau of Economic Research, Inc.
    5. Carlos J. Perez & Manuel Santos, 2017. "On the Dynamics of Speculation in a Model of Bubbles and Manias," Working Papers 2017-02, University of Miami, Department of Economics.
    6. Alessia De Stefani, 2017. "Waves of Optimism: House Price History, Biased Expectations and Credit Cycles," Edinburgh School of Economics Discussion Paper Series 282, Edinburgh School of Economics, University of Edinburgh.
    7. Charles Nathanson & Edward Glaeser, 2015. "An Extrapolative Model of House Price Dynamics," 2015 Meeting Papers 1108, Society for Economic Dynamics.
    8. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2018. "Perception of House Price Risk and Homeownership," CEPR Discussion Papers 13195, C.E.P.R. Discussion Papers.
    9. Edward L. Glaeser & Charles G. Nathanson, 2015. "An Extrapolative Model of House Price Dynamics," NBER Working Papers 21037, National Bureau of Economic Research, Inc.
    10. Glaeser, Edward L. & Nathanson, Charles G., 2015. "An Extrapolative Model of House Price Dynamics," Working Paper Series rwp15-012, Harvard University, John F. Kennedy School of Government.
    11. Glaeser, Edward L. & Nathanson, Charles G., 2017. "An extrapolative model of house price dynamics," Journal of Financial Economics, Elsevier, vol. 126(1), pages 147-170.
    12. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2022. "Housing Markets, Expectation Formation And Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 26(2), pages 491-532, March.
    13. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2021. "Heterogeneous expectations, housing bubbles and tax policy," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 555-573.
    14. Edward Glaeser & Wei Huang & Yueran Ma & Andrei Shleifer, 2017. "A Real Estate Boom with Chinese Characteristics," Journal of Economic Perspectives, American Economic Association, vol. 31(1), pages 93-116, Winter.
    15. Alessia De Stefani, 2021. "House price history, biased expectations, and credit cycles: The role of housing investors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1238-1266, December.
    16. Man Xu & Qing Shi, 2018. "A Theoretic Approach to China's Housing Market Boom and Down Payment Loans," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 265-278, May.
    17. Jack Favilukis & Stijn Van Nieuwerburgh, 2021. "Out‐of‐Town Home Buyers and City Welfare," Journal of Finance, American Finance Association, vol. 76(5), pages 2577-2638, October.
    18. Malmendier, Ulrike M. & Botsch, Matthew J., 2020. "The Long Shadows of the Great Inflation: Evidence from Residential Mortgages," CEPR Discussion Papers 14934, C.E.P.R. Discussion Papers.
    19. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    20. Bauer, Gregory H., 2017. "International house price cycles, monetary policy and credit," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 88-114.

    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:23030. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.