IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/13-18.html
   My bibliography  Save this paper

Booms and Busts in House Prices Explained by Constraints in Housing Supply

Author

Listed:
  • Narayan Bulusu
  • Jefferson Duarte
  • Carles Vergara-Alert

Abstract

We study the importance of supply constraints in explaining the heterogeneity in house price cycles across geographies in the United States. Comparing the equilibrium house price generated with and without supply constraints in a representative-agent model under irreversibility of housing investment, we derive a relationship between housing returns and changes in supply constraints and determinants of housing demand. Our empirical analysis shows that supply constraints play an important role in Metropolitan Statistical Areas (MSAs) with boom-and-bust behavior. We estimate that, in 19 of the largest MSAs in the United States, supply constraints contributed 25% to the dramatic rise in house prices from 2000 to 2006, and 17% to their sharp fall from 2006 to 2010.

Suggested Citation

  • Narayan Bulusu & Jefferson Duarte & Carles Vergara-Alert, 2013. "Booms and Busts in House Prices Explained by Constraints in Housing Supply," Staff Working Papers 13-18, Bank of Canada.
  • Handle: RePEc:bca:bocawp:13-18
    as

    Download full text from publisher

    File URL: http://www.bankofcanada.ca/wp-content/uploads/2013/06/wp2013-18.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Piazzesi, Monika & Schneider, Martin & Tuzel, Selale, 2007. "Housing, consumption and asset pricing," Journal of Financial Economics, Elsevier, vol. 83(3), pages 531-569, March.
    2. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2006. "Urban growth and housing supply," Journal of Economic Geography, Oxford University Press, vol. 6(1), pages 71-89, January.
    3. Glaeser, Edward L. & Gyourko, Joseph & Saiz, Albert, 2008. "Housing supply and housing bubbles," Journal of Urban Economics, Elsevier, vol. 64(2), pages 198-217, September.
    4. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    5. Grenadier, Steven R, 1996. " The Strategic Exercise of Options: Development Cascades and Overbuilding in Real Estate Markets," Journal of Finance, American Finance Association, vol. 51(5), pages 1653-1679, December.
    6. 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.
    7. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    8. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    9. Mayer, Christopher J. & Somerville, C. Tsuriel, 2000. "Land use regulation and new construction," Regional Science and Urban Economics, Elsevier, vol. 30(6), pages 639-662, December.
    10. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    11. William C. Wheaton & William Eric Simonton, 2007. "The Secular and Cyclic Behavior of "True" Construction Costs," Journal of Real Estate Research, American Real Estate Society, vol. 29(1), pages 1-26.
    12. Frech, H. III & Lafferty, Ronald N., 1984. "The effect of the California Coastal Commission on housing prices," Journal of Urban Economics, Elsevier, vol. 16(1), pages 105-123, July.
    13. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, April.
    14. Edward C. Prescott & Rajnish Mehra, 2005. "Recursive Competitive Equilibrium: The Case Of Homogeneous Households," World Scientific Book Chapters,in: Theory Of Valuation, chapter 11, pages 357-371 World Scientific Publishing Co. Pte. Ltd..
    15. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
    16. Andrew Haughwout & Richard W. Peach & John Sporn & Joseph Tracy, 2012. "The Supply Side of the Housing Boom and Bust of the 2000s," NBER Chapters,in: Housing and the Financial Crisis, pages 69-104 National Bureau of Economic Research, Inc.
    17. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
    18. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
    19. David Albouy & Gabriel Ehrlich, 2012. "Housing Productivity and the Social Cost of Land-Use Restrictions," NBER Working Papers 18110, National Bureau of Economic Research, Inc.
    20. Saks, Raven E., 2008. "Job creation and housing construction: Constraints on metropolitan area employment growth," Journal of Urban Economics, Elsevier, vol. 64(1), pages 178-195, July.
    21. DiPasquale, Denise, 1999. "Why Don't We Know More about Housing Supply?," The Journal of Real Estate Finance and Economics, Springer, vol. 18(1), pages 9-23, January.
    22. Carlos Garriga & Rodolfo E. Manuelli & Adrian Peralta-Alva, 2012. "A model of price swings in the housing market," Working Papers 2012-022, Federal Reserve Bank of St. Louis.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lozano Navarro, Francisco-Javier, 2015. "Elasticidad precio de la oferta inmobiliaria en el Gran Santiago
      [Housing supply elasticity in Greater Santiago]
      ," MPRA Paper 65012, University Library of Munich, Germany.
    2. repec:dau:papers:123456789/13289 is not listed on IDEAS
    3. Colin Caines, 2016. "Can Learning Explain Boom-Bust Cycles In Asset Prices? An Application to the US Housing Boom," International Finance Discussion Papers 1181, Board of Governors of the Federal Reserve System (U.S.).
    4. Avouyi-Dovi, S. & Labonne, C. & Lecat, R., 2014. "The housing market: the impact of macroprudential measures in France," Financial Stability Review, Banque de France, issue 18, pages 195-206, April.

    More about this item

    Keywords

    Asset Pricing; Economic models;

    JEL classification:

    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:13-18. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.bank-banque-canada.ca/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.