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Do House Prices Reflect Fundamentals? Aggregate and Panel Data Evidence

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  • Vyacheslav Mikhed
  • Petr Zemcik

Abstract

We investigate whether recently high U.S. house prices are justified by fundamental factors. The standard unit root and cointegration tests with aggregate data indicate that house rent is the only fundamental which has the same order of integration as the price, but these two variables are not cointegrated. Nationwide analysis potentially suffers from problems of the low power of stationarity tests applied to relatively short series and the ignorance of dependence among regional house markets. Therefore, we conduct panel data stationarity tests which are robust to cross-sectional dependence and have greater power than univariate tests. While this time it is inflation and income that have the same order of integration as house price, they are not cointegrated with it, even if combined with the aggregate stock index. It appears that the real estate prices take long swings from their fundamental value and it can take decades before they revert to it.

Suggested Citation

  • Vyacheslav Mikhed & Petr Zemcik, 2007. "Do House Prices Reflect Fundamentals? Aggregate and Panel Data Evidence," CERGE-EI Working Papers wp337, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp337
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    References listed on IDEAS

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    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
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    More about this item

    Keywords

    Cointegration; panel data; unit root; bubble; house prices; rents;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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