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Housing Boom and Bust Cycles

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Author Info

  • Robert F. Martin

    (Board of Governors)

  • Don Schlagenhauf

    (Florida State University)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

Abstract

This paper describes a quantitative model developed to understand the key determinats of house prices boom-and-bust cycles. The key driving forces behind the boom are residential investment, immigration, current account deficits, relaxation of downpayment constraints, and the elimination of land regulation. Housing supply is comprised by the stock of housing and new construction. The baseline economy considers the housing boom in Spain because its peak surpased the magnitude in the United States by 15 percent. A calibrated version of the model for the Spanish economy replicates the pre-boom aggregates. The model predicts that a change in observed fundamentals can rationalize at least 84 percent of the recent boom in the value of housing capital. Without large current account deficits and demographic changes the size of the housing boom should have been much smaller. With respect to the housing bust, the model suggests that the combination of increasing mortgage rates, unemployment, and low productivity can have large effects in the value of housing capital. Some conservative predictions quantify adjustments that range between 24 and 29 percent. The paper explores the boom-bust cycles in other economies such as the United States and Japan.

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File URL: http://www.economicdynamics.org/meetpapers/2010/paper_1080.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1080.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1080

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  1. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Paper 2007-21, Federal Reserve Bank of Atlanta.
  2. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2006. "Why Has House Price Dispersion Gone Up?," NBER Working Papers 12538, National Bureau of Economic Research, Inc.
  3. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  4. Chambers, Matthew & Garriga, Carlos & Schlagenhauf, Don E., 2009. "Housing policy and the progressivity of income taxation," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1116-1134, November.
  5. Robert F. Martin, 2005. "The baby boom: predictability in house prices and interest rates," International Finance Discussion Papers 847, Board of Governors of the Federal Reserve System (U.S.).
  6. Mas Ivars Matilde & Pérez García Francisco & Uriel Jiménez Ezequiel, 2005. "El stock de capital en España y su distribución territorial (1964-2002)," Books, Fundacion BBVA / BBVA Foundation, edition 0, number 201146.
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Cited by:
  1. Stéphane Bonhomme & Laura Hospido, 2012. "The cycle of earnings inequality: evidence from Spanish social security data," Banco de Espa�a Working Papers 1225, Banco de Espa�a.
  2. Jaccard, Ivan, 2012. "Asset pricing and housing supply in a production economy," Working Paper Series 1454, European Central Bank.

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