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A model-free test of rational bubbles: an application to the US housing market

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  • Sergi Basco
  • Maximilian Schäfer-i-Paradís

Abstract

The recent house price appreciation in the United States has renewed the interest in determining the existence of †bubbles†. We provide a model-free test of rational bubbles and apply it to the U.S. housing market. We derive that there exists a bubble when an increase in the current account deficit raises house prices and they are exacerbated in housing supply inelastic municipalities. We apply this test using metropolitan statistical area data between 1990 and 2022. We consider three suspect episodes: (i) 1996-2000, (ii) 2002- 2006 and (ii) 2020-22. Our findings are consistent with the existence of only one housing bubble episode (2002-06).  A strength of this test is that it can be easily applied in real time in any country.

Suggested Citation

  • Sergi Basco & Maximilian Schäfer-i-Paradís, 2025. "A model-free test of rational bubbles: an application to the US housing market," Economics and Business Letters, Oviedo University Press, vol. 14(2), pages 117-125.
    • Handle: RePEc:ove:journl:aid:21644
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