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Bubble, Bubble, Where's the Housing Bubble?

Author

Listed:
  • Margaret Hwang Smith

    (Pomona College)

  • Gary Smith

    (Pomona College)

Abstract

Discussions of whether a housing bubble exists generally rely on indirect barometers such as rapidly increasing prices, unrealistic expectations of future price increases, and rising ratios of housing price indexes to indexes of household income. Such measures cannot, however, answer the key question of whether housing prices are justified by the value of the services that a home provides. We show how to estimate the fundamental value of a home from rent data. We then apply this procedure in ten metropolitan areas, using a unique set of rent and sale price data for matched single-family homes. We do not find evidence of a bubble in most of these cities: under a variety of plausible assumptions, buying a home in these cities today still appears to be an attractive long-term investment.

Suggested Citation

  • Margaret Hwang Smith & Gary Smith, 2006. "Bubble, Bubble, Where's the Housing Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 1-68.
  • Handle: RePEc:bin:bpeajo:v:37:y:2006:i:2006-1:p:1-68
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    File URL: https://www.brookings.edu/wp-content/uploads/2006/03/2006a_bpea_smith.pdf
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    References listed on IDEAS

    as
    1. Meese Richard & Wallace Nancy, 1994. "Testing the Present Value Relation for Housing Prices: Should I Leave My House in San Francisco?," Journal of Urban Economics, Elsevier, vol. 35(3), pages 245-266, May.
    2. Goodman, Allen C., 1988. "An econometric model of housing price, permanent income, tenure choice, and housing demand," Journal of Urban Economics, Elsevier, vol. 23(3), pages 327-353, May.
    3. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next \\"bubble\\"?," Economic Policy Review, Federal Reserve Bank of New York, issue dec, pages 1-17.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    housing bubble; macroeconomics; bubble; house;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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