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Expectations and the Real Estate Boom and Bust of the Late 2000s

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Atlanta Marriott Marquis, International 8
Hosted By: American Economic Association
  • Chair: Itzhak Ben-David, Ohio State University and NBER

The Housing Boom and Bust: Model Meets Evidence

Greg Kaplan
,
University of Chicago, IFS and NBER
Kurt Mitman
,
Institute for International Economic Studies, Stockholm University and CEPR
Giovanni L. Violante
,
Princeton University, CEPR, IFS and NBER

Abstract

We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.

Economic Consequences of Housing Speculation

Zhenyu Gao
,
Chinese University of Hong Kong
Michael Sockin
,
University of Texas-Austin
Wei Xiong
,
Princeton University and NBER

Abstract

By exploiting variation in state capital gains taxation as an instrument, we analyze the economic consequences of housing speculation during the U.S. housing boom in the 2000s. We find that housing speculation, anchored, in part, on extrapolation of past housing price changes, led not only to greater price appreciation, economic expansions, and housing construction during the boom in 2004-2006, but also to more severe economic downturns during the subsequent bust in 2007-2009. Our analysis supports supply overhang and local household demand as two key channels for transmitting these adverse effects.

Speculative Dynamics of Prices and Volume

Anthony DeFusco
,
Northwestern University
Charles Gordon Nathanson
,
Northwestern University
Eric Zwick
,
University of Chicago

Abstract

We present a dynamic theory of prices and volume in asset bubbles. In our framework, predictable price increases endogenously attract short-term investors more strongly than long-term investors. Short-term investors amplify volume by selling more frequently, and they destabilize prices through positive feedback. Our model predicts a lead-lag relationship between volume and prices, which we confirm in the 2000-2011 US housing bubble. Using data on 50 million home sales from this episode, we document that much of the variation in volume arose from the rise and fall in short-term investment.

Expectations During the U.S. Housing Boom: Inferring Beliefs from Actions

Itzhak Ben-David
,
Ohio State University and NBER
Pascal Towbin
,
Swiss National Bank
Sebastian Weber
,
International Monetary Fund

Abstract

We assess the role of price expectations in forming the U.S. housing boom in the mid-2000s by studying the dynamics of vacant properties. When agents anticipate price increases, they amass excess capacity. Thus, housing vacancy discriminates between price movements related to housing demand shocks (low vacancy) and expectation shocks (high vacancy). We implement this idea using a structural VAR with sign restrictions. In the aggregate, expectations shocks are the most important factor explaining the boom, immediately followed by mortgage rate shocks. In the cross-section, expectations shocks are the major factor explaining price movements in the Sand States.
Discussant(s)
Carlos Garriga
,
Federal Reserve Bank of St. Louis
Monika Piazzesi
,
Stanford University
Andreas Fuster
,
Swiss National Bank
Christopher M. Otrok
,
University of Missouri and Federal Reserve Bank of St. Louis
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • G0 - General