Expectations, Efficiency, and Euphoria in the Housing Market
Dennis R. Capozza, Paul J. Seguin
NBER Working Paper No. 5179
This paper studies expectations of capital appreciation in the housing market. We show that expectations impounded in the rent/price ratio at the beginning of the decade successfully predict appreciation rates, but only if we first control for cross-sectional differences in the quality of rental versus owner-occupied housing. We also demonstrate that observed rent/price ratios contain a disequilibrium component that also has power to forecast subsequent appreciation rates. Finally, we provide evidence consistent with euphoria: participants in housing markets appear to overreact to income growth.
Published: Regional Science & Urban Economics, vol. 26, no. 3-4, pp. 369-386, June 1996