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Housing Bubbles

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Author Info

  • David Lopez-Salido

    (Federal Reserve Board)

  • Oscar Arce

    (Bank of Spain)

Abstract

In this paper we use the notion of a housing bubble as an equilibrium in which some investors hold houses only for resale purposes and not for the expectation of a dividend, either in the form of rents or utility. We provide a life-cycle model where households face collateral constraints that tie their credit capacity to the value of their houses and examine the conditions under which housing bubbles can emerge. In such equilibria, the total housing stock is held by owners that extract utility from their homes, landlords that obtain rents, and investors. We show that an economy with tighter collateral constraints is more prone to bubbles which, in turn, tend to have a larger size but are less fragile in face of fund-draining shocks. Our environment also allows for pure bubbles on useless assets. We find that multiple equilibria in which the economy moves endogenously from a pure bubble to a housing bubble regime and vice versa are possible. This suggests that high asset price volatility may be a natural consequence of asset shortages (or excess funding) that depress interest rates sufficiently so as to sustain an initial bubble. We also examine some welfare implications of the two types of bubbles and discuss some mechanisms to rule out equilibria with housing bubbles.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 134.

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Date of creation: 2008
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Handle: RePEc:red:sed008:134

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  1. Ricardo J. Caballero, 2006. "On the Macroeconomics of Asset Shortages," NBER Working Papers 12753, National Bureau of Economic Research, Inc.
  2. Jovanovic, Boyan, 2008. "Bubbles In Prices Of Exhaustible Resources," Working Papers 45830, American Association of Wine Economists.
  3. Maurice Obstfeld & Kenneth Rogoff, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
  4. Ortalo-Magné, François & Rady, Sven, 2005. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 50, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Jesus Fernández-Villaverde & Dirk Krueger, 2007. "Consumption over the Life Cycle: Facts from Consumer Expenditure Survey Data," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 552-565, August.
  6. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2007. " Winners and Losers in Housing Markets," CDMA Conference Paper Series 0705, Centre for Dynamic Macroeconomic Analysis.
  7. Alberto Martin & Jaume Ventura, 2010. "Economic Growth with Bubbles," NBER Working Papers 15870, National Bureau of Economic Research, Inc.
  8. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  10. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers 3657, C.E.P.R. Discussion Papers.
  11. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  12. S. Rao Aiyagari, 1987. "Equilibrium existence in an overlapping generations model with altruistic preferences," Working Papers 356, Federal Reserve Bank of Minneapolis.
  13. Ricardo J. Caballero & Emmanuel Farhi & Mohamad L. Hammour, 2006. "Speculative Growth: Hints from the U.S. Economy," American Economic Review, American Economic Association, vol. 96(4), pages 1159-1192, September.
  14. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  15. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
  16. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
  17. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  18. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2010. "Winners and Losers in House Markets," Working Papers 2010-5, Central Bank of Cyprus.
  19. 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.
  20. Donald R. Haurin & Patric H. Hendershott & Susan M. Wachter, 1996. "Borrowing Constraints and the Tenure Choice of Young Households," NBER Working Papers 5630, National Bureau of Economic Research, Inc.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How can housing bubbles happen?
    by Economic Logician in Economic Logic on 2008-08-18 14:16:00
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Cited by:
  1. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2010. "Expectations-driven cycles in the housing market," Banco de Espa�a Working Papers 1021, Banco de Espa�a.
  2. Yu Zhu & Randall Wright & Chao He, 2012. "Housing and Liquidity," 2012 Meeting Papers 94, Society for Economic Dynamics.
  3. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
  4. Basco, Sergi, 2014. "Globalization and financial development: A model of the Dot-Com and the Housing Bubbles," Journal of International Economics, Elsevier, vol. 92(1), pages 78-94.
  5. Juan S Mora-Sanguinetti & Margarita Rubio, 2013. "Recent Reforms in Spanish Housing Markets: An Evaluation using a DSGE Model," Discussion Papers 2013/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  6. Oscar Arce & Jose Manuel Campa & Angel Gavilan, 2012. "Macroeconomic Adjustment under Loose Financing Conditions in the Construction Sector," Working Papers 1226, BBVA Bank, Economic Research Department.
  7. Fernando Ferreira & Joseph Gyourko, 2011. "Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and Metropolitan Areas, 1993-2009," NBER Working Papers 17374, National Bureau of Economic Research, Inc.

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