Do House Prices Reflect Fundamentals? Aggregate and Panel Data Evidence

Petr Zemcik and Vyacheslav Mikhed

ERES from European Real Estate Society (ERES)

Abstract: "We investigate whether recently high and consequently rapidly decreasing U.S. house prices have been justiØed by fundamental factors such as personal income, population, house rent, stock market wealth, building costs, and mortgage rate. We Ørst conduct the standard unit root and cointegration tests with aggregate data. Nationwide analysis potentially suÆers from problems of the low power of stationarity tests and the ignorance of dependence among regional house markets. Therefore, we also employ panel data stationarity tests which are robust to cross-sectional dependence. Contrary to previous panel studies of the U.S. housing market, we consider several, not just one, fundamental factors. Our results conØrm that panel data unit root tests have greater power as compared with univariate tests. However, the overall conclusions are the same for both methodologies. The house price does not align with the fundamentals in sub-samples prior to 1996 and from 1997 to 2006. It appears that the real estate prices take long swings from their fundamental value and it can take decades before they revert to it. The most recent correction (a collapsed bubble) occurred around 2006.""

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2009-01-01
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Citations: View citations in EconPapers (82)

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