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The 1998 ?2005 Housing "Bubble" and the Current "Correction": What’s Different This Time?

Author

Listed:
  • William C. Wheaton

    () (Massachusetts Institute of Technology Cambridge, MA 02139)

  • Gleb Nechayev

    () (Torto Wheaton Research Boston, MA 02110-3036)

Abstract

This paper examines the inflation in housing prices between 1998 and 2005 and investigates whether this run-up in prices can be ‘‘explained’’ by increases in demand fundamentals such as population, income growth, and the decline in interest rates over this period. Time series models are estimated for 59 MSA markets and price changes from 1998 to 2005 are dynamically forecast using actual economic fundamentals to drive the models. In all 59 markets, the growth in fundamentals from 1998 to 2005 forecasts price growth that is far below that which actually occurred. An examination of the 2005 forecast errors reveals they are greater in larger MSAs, in MSAs where second home and speculative buying was prevalent, and in MSAs where indicators suggest the sub-prime mortgage market was most active. These latter factors are unique to the recent housing market and hence make it difficult to asses if and how far housing prices will ‘‘correct’’ after 2005.

Suggested Citation

  • William C. Wheaton & Gleb Nechayev, 2008. "The 1998 ?2005 Housing "Bubble" and the Current "Correction": What’s Different This Time?," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 1-26.
  • Handle: RePEc:jre:issued:v:30:n:1:2008:p:1-26
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    Cited by:

    1. Füss, Roland & Zietz, Joachim, 2016. "The economic drivers of differences in house price inflation rates across MSAs," Journal of Housing Economics, Elsevier, vol. 31(C), pages 35-53.
    2. Frank Packer & Timothy Riddiough, 2012. "Securitisation and the Commercial Property Cycle," RBA Annual Conference Volume,in: Alexandra Heath & Frank Packer & Callan Windsor (ed.), Property Markets and Financial Stability Reserve Bank of Australia.
    3. Zhang, Yanbing & Hua, Xiuping & Zhao, Liang, 2012. "Exploring determinants of housing prices: A case study of Chinese experience in 1999–2010," Economic Modelling, Elsevier, vol. 29(6), pages 2349-2361.
    4. Tyler T. Yang & Jessie Y. Zhang, 2016. "Contagious Real Estate Cycle: Case of the US Subprime Related Crisis," International Real Estate Review, Asian Real Estate Society, vol. 19(2), pages 171-196.
    5. Huang, MeiChi, 2014. "Bubble-like housing boom–bust cycles: Evidence from the predictive power of households’ expectations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 2-16.
    6. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
    7. Anundsen, André Kallåk & Heebøll, Christian, 2016. "Supply restrictions, subprime lending and regional US house prices," Journal of Housing Economics, Elsevier, vol. 31(C), pages 54-72.
    8. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
    9. Huang, Daisy J. & Leung, Charles K. & Qu, Baozhi, 2015. "Do bank loans and local amenities explain Chinese urban house prices?," China Economic Review, Elsevier, vol. 34(C), pages 19-38.
    10. Todd Sinai, 2012. "House Price Moments in Boom-Bust Cycles," NBER Chapters,in: Housing and the Financial Crisis, pages 19-68 National Bureau of Economic Research, Inc.
    11. repec:fip:fedreq:y:2012:i:2q:p:111-138:n:vol.98no.2 is not listed on IDEAS
    12. Geoffrey M. Ngene & Daniel P. Sohn & M. Kabir Hassan, 2017. "Time-Varying and Spatial Herding Behavior in the US Housing Market: Evidence from Direct Housing Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 54(4), pages 482-514, May.
    13. Davidson, Andrew & Levin, Alex & Pavlov, Andrey D. & Wachter, Susan M., 2016. "Why are aggressive mortgage products bad for the housing market?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 148-161.
    14. MeiChi Huang, 2013. "The Role of People’s Expectation in the Recent US Housing Boom and Bust," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 452-479, April.
    15. Shen, Chung-Hua & Lin, Kun-Li & Guo, Na, 2016. "Hawk or dove: Switching regression model for the monetary policy reaction function in China," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 94-111.
    16. Breck L. Robinson, 2012. "The performance of non-owner-occupied mortgages during the housing crisis," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 111-138.
    17. Rose N. Lai & Robert A. Van Order, 2010. "Momentum and House Price Growth in the United States: Anatomy of a Bubble," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(4), pages 753-773, Winter.
    18. 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.
    19. Shi, Song & Jou, Jyh-Bang & Tripe, David, 2014. "Can interest rates really control house prices? Effectiveness and implications for macroprudential policy," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 15-28.
    20. Glaeser, Edward L. & Nathanson, Charles G., 2015. "Housing Bubbles," Handbook of Regional and Urban Economics, Elsevier.
    21. Furlong, Frederick T. & Takhtamanova, Yelena & Lang, David, 2014. "Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type," Working Paper Series 2014-5, Federal Reserve Bank of San Francisco, revised Mar 2014.
    22. MeiChi Huang, 2014. "Monetary policy implications of housing shift-contagion across regional markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(4), pages 589-608, October.
    23. Marsha J. Courchane & Cynthia Holmes, 2014. "Bubble, Bubble ¡V Is there House Price Trouble -- in Canada?," International Real Estate Review, Asian Real Estate Society, vol. 17(1), pages 109-135.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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