Working Paper: NBER ID: w29140
Authors: Gabriel Chodorow-Reich; Adam M. Guren; Timothy J. McQuade
Abstract: With “2020 hindsight,” the 2000s housing cycle is not a boom-bust but a boom-bust- rebound. Using a spatial equilibrium regression in which house prices are determined by income, amenities, urbanization, and supply, we show that long-run city-level fundamentals predict not only 1997-2019 price and rent growth but also the amplitude of the boom-bust-rebound. This evidence motivates our model of a cycle rooted in fundamentals. Households learn about fundamentals by observing “dividends” but become over-optimistic in the boom due to diagnostic expectations. A bust ensues when 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 shock and accounts quantitatively for the dynamics of prices, rents, and foreclosures in cities with the largest cycles. We draw implications for asset cycles more generally.
Keywords: Housing Cycle; Asset Prices; Spatial Equilibrium; Fundamentals; Boom-Bust Rebound
JEL Codes: E32; G01; G4; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| overoptimism during the boom phase (E32) | amplitude of the boom-bust-rebound cycle (E32) |
| amplitude of the boom-bust-rebound cycle (E32) | price declines during the bust (E32) |
| foreclosure spiral (E44) | exacerbation of price declines during the bust (E32) |
| prices converging to paths aligned with higher fundamental growth (F62) | rebound phase (E32) |
| long-run city-level fundamentals (R11) | price growth (E30) |
| long-run city-level fundamentals (R11) | rent growth (R33) |