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Expectations, efficiency, and euphoria in the housing market

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

Abstract

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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Suggested Citation

  • Capozza, Dennis R. & Seguin, Paul J., 1996. "Expectations, efficiency, and euphoria in the housing market," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 369-386, June.
  • Handle: RePEc:eee:regeco:v:26:y:1996:i:3-4:p:369-386
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    More about this item

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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