A Variance Decomposition Analysis of the Housing Bubble

Jeffery Bredthauer and John Geppert

Journal of Real Estate Portfolio Management, 2013, vol. 19, issue 3, 235-253

Abstract: Executive Summary. This study uses a variance ratio procedure derived from the Campbell-Shiller return decomposition to test for evidence of a bubble in housing returns for the period 1997 to 2007. Within a common vector auto regression (VAR), we find strong shared behavior in the cash flow derived returns of housing and equities. We conclude that economic fundamentals explain the increases in housing (and stock). This paper contributes to the literature by providing evidence against the commonly-held perception of a bubble in housing returns due to speculation, but rather evidence of price appreciation due to fundamental factors shared with equity markets.

Date: 2013
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DOI: 10.1080/10835547.2013.12089957

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