Working Paper: NBER ID: w18825
Authors: Edward L. Glaeser
Abstract: The great housing convulsion that buffeted America between 2000 and 2010 has historical precedents, from the frontier land boom of the 1790s to the skyscraper craze of the 1920s. But this time was different. There was far less real uncertainty about fundamental economic and geographic trends, making the convulsion even more puzzling. During historic and recent booms, sensible models could justify high prices on the basis of seemingly reasonable projections about stable or growing prices. The recurring error appears to be a failure to anticipate the impact that elastic supply will eventually have on prices, whether for cotton in Alabama in 1820 or land in Las Vegas in 2006. Buyers don't appear to be irrational but rather cognitively limited investors who work with simple heuristic models, instead of a comprehensive general equilibrium framework. Low interest rates rarely seem to drive price growth; under-priced default options are a more common contributor to high prices. The primary cost of booms has not typically been overbuilding, but rather the financial chaos that accompanies housing downturns.
Keywords: Real Estate; Speculation; Housing Market; Cognitive Limitations; Financial Chaos
JEL Codes: D00; N00; R00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | housing prices (R31) |
| underpriced default options (G13) | housing prices (R31) |
| cognitive limitations of buyers (D91) | housing prices (R31) |
| historical land booms (N91) | great housing convulsion from 2000 to 2010 (R31) |
| financial chaos following housing downturns (G59) | costs of booms (Q33) |
| limited cognition of buyers (D83) | underestimation of elastic supply impact (H31) |