U.S. House Prices over the Last 30 Years: Bubbles, Regime Shifts and Market (In)Efficiency

Abstract

This paper studies U.S. house prices across 45 metropolitan areas from 1980 to 2012. It applies a version of the Gordon dividend discount model for long-run "fundamentals" and uses Mean Group and Pooled Mean Group estimation to estimate long-run and short-run determinants of house prices. We find great similarity across cities in that the long-run house prices are largely explained by the same fundamentals; the long-run rent to price ratio is approximately 5% plus 0.75 times the real interest rate (which is on the order of 2%). However, adjustments to deviations from the fundamentals are slow, in the long-run, closing the gap at a rate of around 10% per year. We find sharp differences in shortrun adjustments (momentum) away from the fundamentals across cities, and the differences are correlated with local supply elasticities (more momentum with lower elasticity). Analysis of residuals suggests strong cyclical deviations, which are mean-reverting.

U.S. Metropolitan House Price Dynamics

“…These early studies generally ignore complications regarding the suitability of the estimators for non-stationary and cross-sectionally dependent data. Anundsen and Heebøll (2014), Oikarinen and Engblom (2016), and Lai and Van Order (2017) represent more recent studies using panel models that allow for heterogeneity in slope coefficients. Anundsen and Heebøll (2014) explore differences across the largest 100 U.S. Metropolitan Statistical Areas (MSAs) using several methods, including the mean group and pooled mean group estimators of Pesaran and Smith (1995) and Pesaran et al (1999).…”

Homeownership motivation, rationality, and housing prices: Evidence from gloom, boom, and bust‐and‐boom economies

“…In particular, Gallin (2008), looking into the capability of the rent-toprice ratio to predict real rents and prices, found that this ratio did have some predictive power for real prices over periods of 4 years but failed to predict changes in real rent over periods of the same duration. Additional evidence has also been provided by Goswami and Tan (2012), Piazzesi, Schneider, and Tuzel (2007), Hiebert andSydow (2011), Liu, Miao, andZha (2016), and Lai and Order (2017).…”

Property Investment and Rental Rate under Housing Price Uncertainty: A Real Options Approach

“…Moreover, the housing boom and bust cycle has called attention to the volatility of housing prices, as well as their connection to business and financial cycles and impact on other markets. Lai and Van Order () find regime shifts in U.S. housing prices over the past 30 years. Another important dimension that remains largely unexplored in the academic literature is that rent is not discretionary as in the case of dividends on stocks, but is determined in the rental market.…”