Working Paper: NBER ID: w4774
Authors: Jesse M. Abraham; Patric H. Hendershott
Abstract: A commonsense and empirically supported approach to explaining metropolitan real house price changes is for the theory to describe an equilibrium price level to which the market is constantly adjusting. The determinants of real house price appreciation, then, can be divided into two groups, one that explains changes in the equilibrium price and the other that accounts for the adjustment dynamics or changing deviations from the equilibrium price. The former group includes the growth in real income and real construction costs and changes in the real after-tax interest rate. The latter group consists of lagged real appreciation and the difference between the actual and equilibrium real house price levels. Either group of variables can explain a little over two-fifths of the variation in real house price movements in 30 cities over the 1977-92 period; together, they explain three-fifths.
Keywords: housing markets; bubbles; real estate prices; economic fluctuations
JEL Codes: R31; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real income growth (O49) | equilibrium price (D41) |
| real construction costs (L74) | equilibrium price (D41) |
| real after-tax interest rates (E43) | equilibrium price (D41) |
| lagged appreciation rates (F31) | current price levels (E30) |
| deviations from fundamental price levels (E30) | future price dynamics (G13) |