Understanding Booms and Busts in Housing Markets
Some booms in housing prices are followed by busts. Others are not. It is generally difficult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.” Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.
We thank Eric Aldrich, Fernando Alvarez, Veronica Guerrieri, Lars Hansen, Peter Howitt, John Leahy, Monika Piazzesi, Martin Schneider, Rob Shimer, Susan Woodward and six anonymous referees for their comments. We also thank Yana Gallen and Andreas Neuhierl for research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2016. "Understanding Booms and Busts in Housing Markets," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 000 - 000. citation courtesy of