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

Gabriel Chodorow-Reich, Adam Guren and Timothy J McQuade

The Review of Economic Studies, 2024, vol. 91, issue 2, 785-816

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.

Keywords: Housing; Boom–Bust; Assest Price; Cycles (search for similar items in EconPapers)
Date: 2024
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