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Endogenous Housing Market Cycles

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Housing markets tend to display both positive serial correlation as well as a considerable volatility over time. We present a stochastic model illustrating the connection between adaptive expectations and market fluctuations. All macro economic and demographic variables stay fixed over time and price movements are driven by expectations only. In the case where agents face unconstrained mortgage financing, the housing market oscillations are regular and depend on mortgage to income ratios. When credit institutions are introduced, which view houses as mortgage collaterals, the dynamics get complex. Periods of mild oscillations are mixed with violent collapses in an unpredictable manner.

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  • Trond Borgersen & Dag Einar Sommervoll & Tom Wennemo, 2006. "Endogenous Housing Market Cycles," Discussion Papers 458, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:458
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    1. Hommes, Cars H., 1998. "On the consistency of backward-looking expectations: The case of the cobweb," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 333-362, January.
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    4. Bourassa, Steven C. & Hoesli, Martin & Peng, Vincent S., 2003. "Do housing submarkets really matter?," Journal of Housing Economics, Elsevier, pages 12-28.
    5. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, pages 125-137.
    6. Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
    7. Marcet, Albert & Sargent, Thomas J, 1988. "The Fate of Systems with "Adaptive" Expectations," American Economic Review, American Economic Association, pages 168-172.
    8. Satchell, Steve & Timmermann, Allan, 1995. "On the optimality of adaptive expectations: Muth revisited," International Journal of Forecasting, Elsevier, vol. 11(3), pages 407-416, September.
    9. Boldrin, Michele & Woodford, Michael, 1990. "Equilibrium models displaying endogenous fluctuations and chaos : A survey," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 189-222, March.
    10. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
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    Keywords

    Heterogeneous agents; adaptive expectation; credit score models; house price cycles;

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