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Understanding Booms and Busts in Housing Markets

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Listed author(s):
  • Burnside, Craig
  • Eichenbaum, Martin
  • Rebelo, Sérgio

Abstract

Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model that is consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics". Agents meet randomly and those with tighter priors are more likely to convert other agents to their beliefs. The model generates a "fad": the fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate boom-busts or protracted booms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8232.

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Date of creation: Feb 2011
Handle: RePEc:cpr:ceprdp:8232
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Keywords: housing prices; real estate;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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  1. Behzad T. Diba & Herschel I. Grossman, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 697-700.
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  1. Canadian Macro Study Group
  2. Understanding Booms and Busts in Housing Markets (JPE 2016) in ReplicationWiki

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