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Expectations, Efficiency, and Euphoria in the Housing Market

  • Dennis R. Capozza
  • Paul J. Seguin

This paper studies expectations of capital appreciation in the housing market. We show that expectations impounded in the rent/price ratio at the beginning of the decade successfully predict appreciation rates, but only if we first control for cross-sectional differences in the quality of rental versus owner-occupied housing. We also demonstrate that observed rent/price ratios contain a disequilibrium component that also has power to forecast subsequent appreciation rates. Finally, we provide evidence consistent with euphoria: participants in housing markets appear to overreact to income growth.

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File URL: http://www.nber.org/papers/w5179.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5179.

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Date of creation: Jul 1995
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Publication status: published as Regional Science & Urban Economics, vol. 26, no. 3-4, pp. 369-386, June 1996
Handle: RePEc:nbr:nberwo:5179
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  1. Rose, Louis A., 1989. "Topographical constraints and urban land supply indexes," Journal of Urban Economics, Elsevier, vol. 26(3), pages 335-347, November.
  2. Goetzmann, William Nelson & Jorion, Philippe, 1993. " Testing the Predictive Power of Dividend Yields," Journal of Finance, American Finance Association, vol. 48(2), pages 663-79, June.
  3. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
  4. Karl E. Case & Robert J. Shiller, 1988. "The behavior of home buyers in boom and post-boom markets," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 29-46.
  5. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
  6. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  7. Capozza, Dennis R & Schwann, Gregory M, 1990. "The Value of Risk in Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 3(2), pages 117-40, June.
  8. Hamilton, Bruce W. & Schwab, Robert M., 1985. "Expected appreciation in urban housing markets," Journal of Urban Economics, Elsevier, vol. 18(1), pages 103-118, July.
  9. Meese Richard & Wallace Nancy, 1994. "Testing the Present Value Relation for Housing Prices: Should I Leave My House in San Francisco?," Journal of Urban Economics, Elsevier, vol. 35(3), pages 245-266, May.
  10. Schwert, G William & Seguin, Paul J, 1990. " Heteroskedasticity in Stock Returns," Journal of Finance, American Finance Association, vol. 45(4), pages 1129-55, September.
  11. Dennis R. Capozza & Gregory M. Schwann, 1989. "The Asset Approach to Pricing Urban Land: Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 161-174.
  12. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  13. Ozanne, Larry & Thibodeau, Thomas, 1983. "Explaining metropolitan housing price differences," Journal of Urban Economics, Elsevier, vol. 13(1), pages 51-66, January.
  14. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  15. Karl E. Case, 1989. "The Asset Approach to Pricing Urban Land: Empirical Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 175-176.
  16. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  17. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December.
  18. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  19. Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
  20. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
  21. Capozza Dennis R. & Sick Gordon A., 1994. "The Risk Structure of Land Markets," Journal of Urban Economics, Elsevier, vol. 35(3), pages 297-319, May.
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