Working Paper: CEPR ID: DP8232
Authors: Craig Burnside; Martin Eichenbaum; Sergio Rebelo
Abstract: Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model that is consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics". Agents meet randomly and those with tighter priors are more likely to convert other agents to their beliefs. The model generates a "fad": the fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate boom-busts or protracted booms.
Keywords: housing prices; real estate
JEL Codes: E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Agents with tighter priors about fundamentals (D80) | Persuasion of others (C92) |
| Persuasion of others (C92) | Fluctuations in beliefs of the population (E32) |
| Fluctuations in beliefs of the population (E32) | Boom-bust cycles in housing prices (E32) |
| Tightest priors expecting improvements (C51) | House prices rise (R31) |
| Dominance of expectations of no change (D84) | House prices fall (R31) |
| Dynamics of belief among agents (C73) | Significant market outcomes (D40) |