Price Expectations and the U.S. Housing Boom

July 30, 2015

Preview Citation

Format: Chicago

Pascal Towbin, and Sebastian Weber. Price Expectations and the U.S. Housing Boom, (USA: International Monetary Fund, 2015) accessed December 25, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals.

Subject: Economic theory, Financial institutions, Housing, Housing prices, Inflation, Mortgages, National accounts, Prices, Supply shocks

Keywords: Expectation measure, House price expectation shock, House Price Expectations, House price model, Housing, Housing Boom, Housing Market, Housing price, Housing prices, Inflation, Interest rate terms, Mortgage rate shock, Mortgages, Path house price, Price boom, Price development, Price expectation shock, Price path, Realistic price expectation, Speculation, Supply shocks, VAR, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/182
Stock No:

WPIEA2015182
ISBN:

9781513596235
ISSN:

1018-5941

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