The Baby Boom, the Baby Bust and the Housing Market: A Further Look at the Debate
Recently a number of papers appeared in the literature which analyzed the movement of the real price of housing in the US. Based on their analysis Mankiw and Weil predicted that housing values in the US would fall by 47% over the next twenty years. Understandably, this prediction raised considerable interest and controversy in the literature from scholars who casted serious doubts on the accuracy of the estimates derived by Mankiw and Weil. A major limitation overshadowing the entire debate is lack of rigorous derivation of the estimated models. In this paper we explicitly derive a consistent version of a static model of the housing market tacit in the estimated equations. The model shows that both the real asset price of housing equation and the real rental price of housing equation used by Mankiw and Weil and some of their critics are misspecified. It is suggested that using the correctly specified equations sheds light on the debate and may give more credible estimates of the estimates on which housing prices' predictions are based.
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Volume (Year): 29 (1995)
Issue (Month): 1 (February)
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