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Housing price bubbles, new supply, and within-city dynamics

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  • Liu, Crocker H.
  • Nowak, Adam
  • Rosenthal, Stuart S.

Abstract

Although there is broad recognition that cities differ in their tendency to experience house price bubbles, most studies assume away any possibility of within-city heterogeneity in response to a bubble. We develop a model that suggests that this assumption may be appropriate when markets are rising but can be far from reality on the bust side of a bubble. During a housing boom, new construction and related supply adjustments by developers ensure stable relative prices between low- and high-quality segments of the housing market. On the bust side of a bubble, however, reduced housing starts allow demand-side forces and mortgage default to create pressure for relative prices to diverge across market segments. Absent a change in technology, as markets recover and new construction rebounds, relative prices should revert back to pre-crash levels. Evidence based on 2000–2013 single-family home sales in Phoenix, Arizona supports this modeling framework. Additional evidence also suggests that high rates of mortgage default contributed to divergence in relative prices when markets crashed.

Suggested Citation

  • Liu, Crocker H. & Nowak, Adam & Rosenthal, Stuart S., 2016. "Housing price bubbles, new supply, and within-city dynamics," Journal of Urban Economics, Elsevier, vol. 96(C), pages 55-72.
  • Handle: RePEc:eee:juecon:v:96:y:2016:i:c:p:55-72
    DOI: 10.1016/j.jue.2016.08.002
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    References listed on IDEAS

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    Cited by:

    1. Waltl, Sofie R., 2018. "Estimating quantile-specific rental yields for residential housing in Sydney," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 204-225.
    2. repec:eee:juecon:v:99:y:2017:i:c:p:120-135 is not listed on IDEAS
    3. repec:eee:ecmode:v:66:y:2017:i:c:p:101-111 is not listed on IDEAS

    More about this item

    Keywords

    Housing bubble; Repeat sales; Price dynamics;

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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