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Bubbles or Fundamentals? Understanding Boom and Bust Episodes in the Housing Market

Author

Listed:
  • Rodolfo Manuelli

    (Washington University in St. Louis)

  • Adrian Peralta-Alva

    (Federal Reserve Bank of St. Louis)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

Abstract

In this paper we revisit the connection between changes in interest rates, loan-to-value ratios and expectations in inaÌ uencing housing prices. We construct a two good general equilibrium model in which housing is a composite good produced using structures and land. We show that changes in interest rates that are viewed as permanent have a large impact on house prices, while increases in LTV have smaller e§ects. We also show that if the model is to account for the actual boom and bust in house prices, it must be the case that households were exposed to multiple expectations shocks. Contrary to conventional wisdom, we show that the model can reconcile the disconnectness between house values and rents, addressing an open puzzle in the literature.

Suggested Citation

  • Rodolfo Manuelli & Adrian Peralta-Alva & Carlos Garriga, 2012. "Bubbles or Fundamentals? Understanding Boom and Bust Episodes in the Housing Market," 2012 Meeting Papers 937, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:937
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    File URL: https://economicdynamics.org/meetpapers/2012/paper_937.pdf
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    References listed on IDEAS

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    1. Rosen, Harvey S & Rosen, Kenneth T, 1980. "Federal Taxes and Homeownership: Evidence from Time Series," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 59-75, February.
    2. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, March.
    3. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2009. "Accounting For Changes In The Homeownership Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 677-726, August.
    4. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
    5. Chambers, Matthew & Garriga, Carlos & Schlagenhauf, Don E., 2009. "Housing policy and the progressivity of income taxation," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1116-1134, November.
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