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Could the Bubble in U.S. House Prices Have Been Detected in Real Time?

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  • Luca Benati

Abstract

I explore whether time-series methods exploiting the long-run equilibrium properties of the housing market might have detected the disequilibrium in U.S. house prices which pre-dated the Great Recession as it was building up. Based on real-time data, I show that a VAR in levels identified as in Uhlig (2003, 2004) would have detected the disequilibrium with high confidence by the Summer of 2004, with the estimated extent of overvaluation peaking at about 15 per cent immediately before the crisis. These results demonstrate that disequilibria in the prices of at least one asset class–housing–can indeed be robustly detected as they are building up. Conceptually in line with Cochrane’s (1994) analysis for consumption and GNP, and dividends and stock prices, a key factor in order to robustly identify the transitory component of real house prices is applying Uhlig-style identification to real rents, which are cointegrated with house prices, and are comparatively much closer to the common stochastic trend. Directly focusing on house prices themselves, on the other hand, produces less robust results.

Suggested Citation

  • Luca Benati, 2017. "Could the Bubble in U.S. House Prices Have Been Detected in Real Time?," Diskussionsschriften dp1705, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp1705
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    1. Benati, Luca, 2007. "Drift and breaks in labor productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2847-2877, August.
    2. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    3. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    4. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    5. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
    6. Benati, Luca, 2007. "Drift and breaks in labor productivity," Working Paper Series 718, European Central Bank.
    7. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    8. Michela Scatigna & Robert Szemere & Kostas Tsatsaronis, 2014. "Residential property price statistics across the globe," BIS Quarterly Review, Bank for International Settlements, September.
    9. Joshua Gallin, 2008. "The Long-Run Relationship Between House Prices and Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 635-658, December.
    10. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2012. "Bootstrap Determination of the Co‐Integration Rank in Vector Autoregressive Models," Econometrica, Econometric Society, vol. 80(4), pages 1721-1740, July.
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    Keywords

    Structural VARs; unit roots; cointegration; long-run restrictions; medium-run identification; Great Recession; housing bubbles.;

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