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Where are the speculative bubbles in US housing markets?

  • Goodman, Allen C.
  • Thibodeau, Thomas G.

In the first half of this decade, US house prices experienced significant real rates of appreciation. The dramatic increase in house prices led some economists to conclude that there was a speculative bubble in the US housing market. This paper explores how much of the recent appreciation in US house prices was attributable to the fundamental economic determinants of house prices. On the demand side, we note that the rate of homeownership in the US increased from 66.8% in 1999 to 69% in the fourth quarter of 2005. http://www.census.gov/hhes/www/housing/hvs/historic/histt14.html, accessed 10/17/2007. Each percentage point increase in the homeownership rate increases the demand for owner-occupied housing by about one million units. On the supply side, land prices and housing construction costs increased substantially in real terms over this period. The national average increase in house prices conceals significant spatial variation in appreciation rates. According to OFHEO, house prices in some California cities increased by more than fifteen percent per year during this period while house prices in Texas cities increased four percent per year. The increase in aggregate housing demand had different effects on metropolitan area house prices because housing market supply elasticities vary spatially. We estimate housing supply elasticities for 133 metropolitan areas and conclude that although areas on the East Coast and in California had large observed price increases, they owe much of their house price increases to inelastic supplies of owner-occupied housing.

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Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 17 (2008)
Issue (Month): 2 (June)
Pages: 117-137

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Handle: RePEc:eee:jhouse:v:17:y:2008:i:2:p:117-137
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622881

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  1. Quigley, John M. & Raphael, Steven, 2006. "Regulation and the High Cost of Housing in California," Berkeley Program on Housing and Urban Policy, Working Paper Series qt3hh7s35m, Berkeley Program on Housing and Urban Policy.
  2. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
  3. DiPasquale Denise & Wheaton William C., 1994. "Housing Market Dynamics and the Future of Housing Prices," Journal of Urban Economics, Elsevier, vol. 35(1), pages 1-27, January.
  4. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  5. Ozanne, Larry & Thibodeau, Thomas, 1983. "Explaining metropolitan housing price differences," Journal of Urban Economics, Elsevier, vol. 13(1), pages 51-66, January.
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  7. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
  8. James R. Follain, Jr., 1979. "The Price Elasticity of the Long-Run Supply of New Housing Construction," Land Economics, University of Wisconsin Press, vol. 54(2), pages 190-199.
  9. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  10. Goodman, Allen C., 2005. "Central cities and housing supply: Growth and decline in US cities," Journal of Housing Economics, Elsevier, vol. 14(4), pages 315-335, December.
  11. Karl E. Case & Robert J. Shiller, 1988. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  12. Allen C. Goodman, 2005. "The Other Side of Eight Mile: Suburban Population and Housing Supply," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(3), pages 539-569, 09.
  13. Stiglitz, Joseph E, 1990. "Symposium on Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 13-18, Spring.
  14. Dennis R. Capozza & Patric H. Hendershott & Charlotte Mack, 2004. "An Anatomy of Price Dynamics in Illiquid Markets: Analysis and Evidence from Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(1), pages 1-32, 03.
  15. Capozza, Dennis R. & Helsley, Robert W., 1989. "The fundamentals of land prices and urban growth," Journal of Urban Economics, Elsevier, vol. 26(3), pages 295-306, November.
  16. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  17. Richard K. Green & Patric H. Hendershott, 1995. "Age, Housing Demand, and Real House Prices," Wisconsin-Madison CULER working papers 96-09, University of Wisconsin Center for Urban Land Economic Research.
  18. Olsen, Edgar O., 1987. "The demand and supply of housing service: A critical survey of the empirical literature," Handbook of Regional and Urban Economics, in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 25, pages 989-1022 Elsevier.
  19. Malpezzi, Stephen & Maclennan, Duncan, 2001. "The Long-Run Price Elasticity of Supply of New Residential Construction in the United States and the United Kingdom," Journal of Housing Economics, Elsevier, vol. 10(3), pages 278-306, September.
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