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Trend growth expectations and US house prices before and after the crisis

  • Hoffmann, Mathias
  • Krause, Michael U.
  • Laubach, Thomas

We provide an analysis that might help distinguish rationally justified movements in house prices from potentially non-rational movements, using a two-sector business cycle model, in which investment in housing is subject to collateral constraints. A large portion of the evolution of U.S. house prices during the past 20 years can be reproduced when expectations of future income growth as published in surveys are used as an input into the model. Changes in growth expectations translate into corresponding changes in house prices, since the value of housing must be linked to expected aggregate income. Only since about 2005 do actual and model-implied house prices clearly diverge, calling for explanations not based on economic fundamentals.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 12/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:bubdps:122012
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  8. Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
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  10. James MacGee, 2009. "Why didn’t Canada’s housing market go bust?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep.
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  19. Simon Gilchrist & Masashi Saito, 2006. "Expectations, Asset Prices, and Monetary Policy: The Role of Learning," NBER Working Papers 12442, National Bureau of Economic Research, Inc.
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