Price Expectations and the U.S. Housing Boom

Pascal Towbin and Sebastian Weber

No 2015/182, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; mortgage rate shock; housing price; price expectation shock; expectation measure; Housing Market; House Price Expectations; Speculation; Housing Boom; VAR; interest rate terms; price path; realistic price expectation; price boom; price development; house price expectation shock; house price model; path house price; Housing prices; Housing; Mortgages; Inflation; Supply shocks (search for similar items in EconPapers)
Pages: 35
Date: 2015-07-30
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Citations: View citations in EconPapers (4)

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Working Paper: Price expectations and the US housing boom (2016)
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