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Housing price bubbles, new supply, and within-city dynamics

Crocker H. Liu, Adam Nowak and Stuart Rosenthal ()

Journal of Urban Economics, 2016, vol. 96, issue C, 55-72

Abstract: Although there is broad recognition that cities differ in their tendency to experience house price bubbles, most studies assume away any possibility of within-city heterogeneity in response to a bubble. We develop a model that suggests that this assumption may be appropriate when markets are rising but can be far from reality on the bust side of a bubble. During a housing boom, new construction and related supply adjustments by developers ensure stable relative prices between low- and high-quality segments of the housing market. On the bust side of a bubble, however, reduced housing starts allow demand-side forces and mortgage default to create pressure for relative prices to diverge across market segments. Absent a change in technology, as markets recover and new construction rebounds, relative prices should revert back to pre-crash levels. Evidence based on 2000–2013 single-family home sales in Phoenix, Arizona supports this modeling framework. Additional evidence also suggests that high rates of mortgage default contributed to divergence in relative prices when markets crashed.

Keywords: Housing bubble; Repeat sales; Price dynamics (search for similar items in EconPapers)
JEL-codes: R31 R51 (search for similar items in EconPapers)
Date: 2016
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