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Expectations, efficiency, and euphoria in the housing market

  • Capozza, Dennis R.
  • Seguin, Paul J.

This paper studies expectations of capital appreciation in the housing market. We show that expectations impounded in the rent/price ratio at the beginning of the decade successfully predict appreciation rates, but only if we first control for cross-sectional differences in the quality of rental versus owner-occupied housing. We also demonstrate that observed rent/price ratios contain a disequilibrium component that also has power to forecast subsequent appreciation rates. Finally, we provide evidence consistent with euphoria: participants in housing markets appear to overreact to income growth.

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File URL: http://www.sciencedirect.com/science/article/B6V89-3VW8PDP-6/2/95da5d8204a62e6356970eb0d8dc5791
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Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 26 (1996)
Issue (Month): 3-4 (June)
Pages: 369-386

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Handle: RePEc:eee:regeco:v:26:y:1996:i:3-4:p:369-386
Contact details of provider: Web page: http://www.elsevier.com/locate/regec

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  1. Schwert, G William & Seguin, Paul J, 1990. " Heteroskedasticity in Stock Returns," Journal of Finance, American Finance Association, vol. 45(4), pages 1129-55, September.
  2. Capozza, Dennis R & Schwann, Gregory M, 1990. "The Value of Risk in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 3(2), pages 117-40, June.
  3. 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.
  4. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  5. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
  6. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
  7. Dennis R. Capozza & Gregory M. Schwann, 1989. "The Asset Approach to Pricing Urban Land: Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 161-174.
  8. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  9. Goetzman, W.N. & Jorion, P., 1992. "Testing the Predictive Power of Dividend Yields," Papers 93-03, Columbia - Graduate School of Business.
  10. Hamilton, Bruce W. & Schwab, Robert M., 1985. "Expected appreciation in urban housing markets," Journal of Urban Economics, Elsevier, vol. 18(1), pages 103-118, July.
  11. Robert J. Shiller & Karl E. Case, 1988. "The Behavior of Home Buyers in Boom and Post-Boom Markets," Cowles Foundation Discussion Papers 890, Cowles Foundation for Research in Economics, Yale University.
  12. Karl E. Case, 1989. "The Asset Approach to Pricing Urban Land: Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 175-176.
  13. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  14. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December.
  15. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  16. 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.
  17. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  18. Ozanne, Larry & Thibodeau, Thomas, 1983. "Explaining metropolitan housing price differences," Journal of Urban Economics, Elsevier, vol. 13(1), pages 51-66, January.
  19. Capozza Dennis R. & Sick Gordon A., 1994. "The Risk Structure of Land Markets," Journal of Urban Economics, Elsevier, vol. 35(3), pages 297-319, May.
  20. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  21. Rose, Louis A., 1989. "Topographical constraints and urban land supply indexes," Journal of Urban Economics, Elsevier, vol. 26(3), pages 335-347, November.
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