The 2000s Housing Cycle With 2020 Hindsight: A Neo-Kindlebergerian View

Gabriel Chodorow-Reich, Adam Guren and Timothy J. McQuade

No 29140, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: With “2020 hindsight,” the 2000s housing cycle is not a boom-bust but a boom-bust- rebound. Using a spatial equilibrium regression in which house prices are determined by income, amenities, urbanization, and supply, we show that long-run city-level fundamentals predict not only 1997-2019 price and rent growth but also the amplitude of the boom-bust-rebound. This evidence motivates our model of a cycle rooted in fundamentals. Households learn about fundamentals by observing “dividends” but become over-optimistic in the boom due to diagnostic expectations. A bust ensues when beliefs start to correct, exacerbated by a price-foreclosure spiral that drives prices below their long-run level. The rebound follows as prices converge to a path commensurate with higher fundamental growth. The estimated model explains the boom-bust-rebound with a single shock and accounts quantitatively for the dynamics of prices, rents, and foreclosures in cities with the largest cycles. We draw implications for asset cycles more generally.

JEL-codes: E32 G01 G4 R31 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-isf, nep-mac and nep-ure
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Published as Gabriel Chodorow-Reich & Adam M Guren & Timothy J McQuade, 2024. "The 2000s Housing Cycle with 2020 Hindsight: A Neo-Kindlebergerian View," Review of Economic Studies, vol 91(2), pages 785-816.

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