Predicting Large House Price Declines Using Bubble Tests: A Study of Local U.S. Housing Markets

Tuukka Huhtala, Steven Bourassa, Martin Hoesli, Wilma Nissilä and Elias Oikarinen

ERES from European Real Estate Society (ERES)

Abstract: Econometric tests of house price bubbles based on time series explosiveness have become popular in empirical research. These tests typically have good ex-post performance in identifying bubble periods, but their ability to predict large house price declines ex-ante remains an open question. We study the most popular versions of these tests and assess their usefulness as real-time early warning indicators of large house price declines, a feature valuable for policymakers and investors alike. Using a panel of MSA-level data from the U.S., we estimate local housing market bubble periods indicated by each test and assess their ex-ante accuracy in predicting large house price declines. Consistent with previous studies, we find considerable heterogeneity in bubble periods across locations. Although there are complications with real-time interpretation of bubble signals, they are useful in predicting large house price declines.

Keywords: house price bubbles; U.S. housing markets (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2025-01-01
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