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Housing Bubbles

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  • Edward L. Glaeser
  • Charles G. Nathanson

Abstract

Housing markets experience substantial price volatility, short term price change momentum and mean reversion of prices over the long run. Together these features, particularly at their most extreme, produce the classic shape of an asset bubble. In this paper, we review the stylized facts of housing bubbles and discuss theories that can potentially explain events like the boom-bust cycles of the 2000s. One set of theories assumes rationality and uses idiosyncratic features of the housing market, such as intensive search and short selling constraints, to explain the stylized facts. Cheap credit provides a particularly common rationalization for price booms, but temporary periods of low interest rates will not explain massive price swings in simple rational models. An incorrectly under-priced default option is needed to explain the formation of rational bubbles. Many non-rational explanations for real estate bubbles exist, but the most promising theories emphasize some form of trend-chasing, which in turn reflects boundedly rational learning.

Suggested Citation

  • Edward L. Glaeser & Charles G. Nathanson, 2014. "Housing Bubbles," NBER Working Papers 20426, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20426
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    Cited by:

    1. Fitwi, Abrar M. & Hein, Scott E. & Mercer, Jeffrey M., 2015. "The U.S. housing price bubble: Bernanke versus Taylor," Journal of Economics and Business, Elsevier, vol. 80(C), pages 62-80.
    2. Paolo Gelain & Kevin J. Lansing & Gisle J. Natvik, 2018. "Explaining the Boom–Bust Cycle in the U.S. Housing Market: A Reverse‐Engineering Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1751-1783, December.
    3. Krzysztof Olszewski & Hanna Augustyniak & Jacek Laszek & Robert Leszczynski & Joanna Waszczuk, 2016. "On the dynamics of the primary housing market and the forecasting of house prices," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.
    4. Kerwin Kofi Charles & Erik Hurst & Matthew J. Notowidigdo, 2018. "Housing Booms and Busts, Labor Market Opportunities, and College Attendance," American Economic Review, American Economic Association, vol. 108(10), pages 2947-2994, October.

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    JEL classification:

    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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