The 2000s Housing Cycle With 2020 Hindsight: A Neo-Kindlebergerian View
With “2020 hindsight,” the 2000s housing cycle is not a boom-bust but rather a boom- bust-rebound at both the national level and across cities. We argue this pattern reflects a larger role for fundamentally-rooted explanations than previously thought. We construct a city-level long-run fundamental using a spatial equilibrium regression framework in which house prices are determined by local income, amenities, and supply. The fundamental predicts not only 1997-2019 price and rent growth but also the amplitude of the boom-bust-rebound and foreclosures. This evidence motivates our neo-Kindlebergerian model, in which an improvement in fundamentals triggers a boom-bust-rebound. Agents learn about the fundamentals by observing “dividends” but become over-optimistic due to diagnostic expectations. A bust ensues when over-optimistic 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 fundamental shock and accounts quantitatively for cross-city patterns in the dynamics of prices and foreclosures.
We thank seminar participants at BU, Harvard, Emory/Atlanta Fed, BI Business School, the University of Copenhagen, San Francisco Fed, UCSD, Chicago, and the Boston Fed for useful feedback. Sage Belz, Stefano Pica, and Lei Ma provided excellent research assistance. Chodorow-Reich thanks the Alfred P. Sloan Foundation and Harvard Ferrante Fund for generous financial support. Guren thanks the National Science Foundation (grant SES-1623801) for financial support. The computational work for this paper was performed on Boston University's Shared Computing Cluster. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.