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Predicting Large House Price Declines Using Bubble Tests: A Study of Local U.S. Housing Markets

Author

Listed:
  • Tuukka Huhtala
  • Steven Bourassa
  • Martin Hoesli
  • Wilma Nissilä
  • Elias Oikarinen

Abstract

Econometric tests of house price bubbles based on time series explosiveness have become popular in empirical research. These tests typically have good ex-post performance in identifying bubble periods, but their ability to predict large house price declines ex-ante remains an open question. We study the most popular versions of these tests and assess their usefulness as real-time early warning indicators of large house price declines, a feature valuable for policymakers and investors alike. Using a panel of MSA-level data from the U.S., we estimate local housing market bubble periods indicated by each test and assess their ex-ante accuracy in predicting large house price declines. Consistent with previous studies, we find considerable heterogeneity in bubble periods across locations. Although there are complications with real-time interpretation of bubble signals, they are useful in predicting large house price declines.

Suggested Citation

  • Tuukka Huhtala & Steven Bourassa & Martin Hoesli & Wilma Nissilä & Elias Oikarinen, 2025. "Predicting Large House Price Declines Using Bubble Tests: A Study of Local U.S. Housing Markets," ERES eres2025_127, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2025_127
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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