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Housing Bubbles

In: Handbook of Regional and Urban Economics

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  • Glaeser, Edward L.
  • Nathanson, Charles G.

Abstract

Housing markets experience substantial price volatility, short-term price change momentum, and mean reversion of prices over the long run. Together, these features, particularly at their most extreme, produce the classic shape of an asset bubble. In this chapter, we review the stylized facts of housing bubbles and discuss theories that can potentially explain events like the boom–bust cycles of the 2000s. One set of theories assumes rationality and uses idiosyncratic features of the housing market, such as intensive search and short-selling constraints, to explain the stylized facts. Cheap credit provides a particularly common rationalization for price booms, but temporary periods of low interest rates will not explain massive price swings in simple rational models. An incorrectly underpriced default option can make rational bubbles more likely. Many nonrational explanations for real estate bubbles exist, but the most promising theories emphasize some form of trend chasing, which in turn reflects boundedly rational learning.

Suggested Citation

  • Glaeser, Edward L. & Nathanson, Charles G., 2015. "Housing Bubbles," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 701-751, Elsevier.
  • Handle: RePEc:eee:regchp:5-701
    DOI: 10.1016/B978-0-444-59531-7.00011-9
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    Keywords

    Real estate; Housing; Behavioral economics; Land; Bubble; Speculation; R21;
    All these keywords.

    JEL classification:

    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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