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Testing for rational bubbles in the US housing market

  • Kivedal, Bjørnar Karlsen

The presence of a bubble in the US housing market prior to the 2007 subprime mortgage financial crisis is investigated. This is done by looking into the relationship between house prices and rental prices, known as the price–rent ratio, which is an important measure of a potential deviation between house prices and its fundamental value. Additionally, the interest rate is taken into account since it is an important factor in determining demand for housing mortgages and thereby influencing house prices, and explosive behavior of house prices is considered. These relationships are investigated through a theoretical and econometrical framework. The empirical evidence suggests that there was a bubble in the housing market prior to the financial crisis, even when controlling for the decreasing interest rate and the fundamental information given by the rental price in the period. Explosiveness was the main source of the price increase, such that a bubble was present in the housing market after correcting for other fundamental factors. The econometric procedures used in the analysis may therefore be relevant for monitoring the housing market.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 38 (2013)
Issue (Month): PB ()
Pages: 369-381

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Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:369-381
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Shiller, Robert J., 2007. "Understanding Recent Trends in House Prices and Home Ownership," Working Papers 28, Yale University, Department of Economics.
  2. Bent Nielsen & Tom Engsted, 2010. "Testing for rational bubbles in a co-explosive vector autoregression," Economics Series Working Papers 2010-W06, University of Oxford, Department of Economics.
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  8. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.
  9. Morris A. Davis & Andreas Lehnert & Robert F. Martin, 2008. "The Rent-Price Ratio For The Aggregate Stock Of Owner-Occupied Housing," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 279-284, 06.
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  19. repec:cdl:ucsbec:13-89 is not listed on IDEAS
  20. Reinhart, Carmen & Rogoff, Kenneth, 2008. "¿Es tan diferente la crisis financiera de sub-prime en EEUU? Una comparacion historica internacional
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