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Testing for rational bubbles in the US housing market

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  • Kivedal, Bjørnar Karlsen

Abstract

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.

Suggested Citation

  • Kivedal, Bjørnar Karlsen, 2013. "Testing for rational bubbles in the US housing market," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 369-381.
  • Handle: RePEc:eee:jmacro:v:38:y:2013:i:pb:p:369-381
    DOI: 10.1016/j.jmacro.2013.08.021
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    Citations

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    Cited by:

    1. Engsted, Tom & Hviid, Simon J. & Pedersen, Thomas Q., 2016. "Explosive bubbles in house prices? Evidence from the OECD countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 14-25.
    2. repec:bla:ecorec:v:92:y:2016:i:299:p:590-605 is not listed on IDEAS
    3. Wen-Yuan Lin & I-Chun Tsai, 2016. "Asymmetric Fluctuating Behavior of China's Housing Prices," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 24(2), pages 107-126, March.
    4. Jawadi, Fredj & Soparnot, Richard & Sousa, Ricardo M., 2017. "Assessing financial and housing wealth effects through the lens of a nonlinear framework," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 840-850.
    5. Orlando Gomes, 2016. "Exuberance and social contagion," Economics Bulletin, AccessEcon, vol. 36(3), pages 1705-1714.
    6. Rambaccussing, Dooruj, 2015. "Modelling Housing Prices using a Present Value State Space Model," SIRE Discussion Papers 2015-80, Scottish Institute for Research in Economics (SIRE).
    7. Engsted, Tom & Pedersen, Thomas Q., 2014. "Housing market volatility in the OECD area: Evidence from VAR based return decompositions," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 91-103.
    8. Zhang, Yue-Jun & Wang, Jing, 2015. "Exploring the WTI crude oil price bubble process using the Markov regime switching model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 421(C), pages 377-387.
    9. Dooruj Rambaccussing, 2015. "Modelling Housing Prices using a Present Value State Space Model," Dundee Discussion Papers in Economics 285, Economic Studies, University of Dundee.
    10. Yang Hu & Les Oxley, 2016. "Bubbles in US Regional House Prices: Evidence from House Price/Income Ratios at the State Level," Working Papers in Economics 16/06, University of Waikato.
    11. Rambaccussing, Dooruj, 2015. "Modelling Housing Prices using a Present Value State Space Model," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-32, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. repec:eee:ecmode:v:66:y:2017:i:c:p:101-111 is not listed on IDEAS
    13. Glaeser, Edward L. & Nathanson, Charles G., 2015. "Housing Bubbles," Handbook of Regional and Urban Economics, Elsevier.
    14. Rambaccussing, Dooruj, 2015. "Modelling Housing Prices using a Present Value State Space Model," SIRE Discussion Papers 2015-32, Scottish Institute for Research in Economics (SIRE).
    15. Konstantin Kholodilin, 2015. "Speculative Bubbles in Urban Housing Markets in Germany," ERSA conference papers ersa15p67, European Regional Science Association.

    More about this item

    Keywords

    Rational bubbles; Price-rent ratio; House prices; Cointegration; Vector autoregression;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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