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Understanding booms and busts in housing markets

  • Craig Burnside
  • Martin Eichenbaum
  • Sergio Rebelo

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 consistent with these observations. Real estate agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics." Agents meet randomly with one another. Those with tighter priors are more likely to convert others 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 Federal Reserve Bank of Atlanta in its series FRB Atlanta CQER Working Paper with number 2012-02.

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Date of creation: 2012
Date of revision:
Handle: RePEc:fip:fedacq:2012-02
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  1. Sven Rady, 1998. "Boom In, Bust Out: Young Households and the Housing Price Cycle," FMG Discussion Papers dp310, Financial Markets Group.
  2. Edward L. Glaeser & Joseph Gyourko & Raven Saks, 2005. "Why Have Housing Prices Gone Up?," NBER Working Papers 11129, National Bureau of Economic Research, Inc.
  3. John M. Quigley & Steven Raphael, 2005. "Regulation and the High Cost of Housing in California," American Economic Review, American Economic Association, vol. 95(2), pages 323-328, May.
  4. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  5. Martin Schneider & Monika Piazzesi, 2009. "Momentum traders in a search model of the housing market," 2009 Meeting Papers 1266, Society for Economic Dynamics.
  6. Daron Acemoglu & Victor Chernozhukov & Muhamet Yildiz, 2007. "Learning and Disagreement in an Uncertain World," Carlo Alberto Notebooks 48, Collegio Carlo Alberto.
  7. Monika Piazzesi & Martin Schneider, 2009. "Momentum traders in the housing market: survey evidence and a search model," NBER Working Papers 14669, National Bureau of Economic Research, Inc.
  8. Sendhil Mullainathan & Andrei Shleifer, 2002. "Media Bias," NBER Working Papers 9295, National Bureau of Economic Research, Inc.
  9. Matthew Gentzkow & Jesse M. Shapiro, 2011. "Ideological Segregation Online and Offline," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1799-1839.
  10. Atif Mian & Amir Sufi, 2010. "The Great Recession: Lessons from Microeconomic Data," American Economic Review, American Economic Association, vol. 100(2), pages 51-56, May.
  11. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, Oxford University Press, vol. 125(3), pages 1253-1296.
  12. 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.
  13. Brent W. Ambrose & Piet Eichholtz & Thies Lindenthal, 2013. "House Prices and Fundamentals: 355 Years of Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 477-491, 03.
  14. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
  15. Gadi Barlevy & Jonas D. M. Fisher, 2010. "Mortgage choices and housing speculation," Working Paper Series WP-2010-12, Federal Reserve Bank of Chicago.
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  1. Understanding Booms and Busts in Housing Markets (JPE 2016) in ReplicationWiki
  2. Canadian Macro Study Group

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