Vaughan Economics 639 1 Is There a Bubble in the Housing Market Paper written in 2003 during housing bubble Answer Yes 2 Housing Bubble Definition Excessive public expectations of future price increases cause prices to be temporarily elevated ID: 777903
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Slide1
Case / Shiller“Is There a Bubble in the Housing Market”
Vaughan / Economics 639
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Slide2“Is There a Bubble in the Housing Market”Paper written in 2003
(during housing bubble).Answer: Yes
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Slide3Housing Bubble Definition: Excessive public expectations of future price increases cause prices to be temporarily elevated.
Prices are driven by expectation of price increases rather than by “fundamentals” like:
Personal income per capita
Population
Employment / unemployment
Housing starts
Mortgage interest rates
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Slide4Empirical Evidence
Fundamentals explain housing prices in most states for 1985-2002. Income alone explains home price increases in all but 8 states .
In the 8 states (CA, CT, HI, MA, NH, NJ, NY, RI), adding other fundamentals improves explanatory power, but…
Pattern of smoothly rising and falling price-to-income ratios and
under-forecasting
of home prices in 2000-02 suggests presence of a bubble.
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Slide5SurveyReplicate 1988 survey of recent home buyers.
Four housing marketsOrange County, CA (Suburban LA) – hot market
Alameda County, CA (Suburban SF) –
h
ot market
Middlesex County, MA (Suburban Boston) – hot market
Milwaukee County, WI – control market
Surveys sent to random sample of 500 home buyers between March and August 2002.
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Slide6Survey Evidence
Vast majority of buyers saw purchase as an investment.Vast majority of buyers expected an increase in home prices over the next several years.
Majority agreed it was a good time to buy a home because prices would be rising in the future.
Many were influenced to buy a home because of “excitement” about home prices.
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Slide7Survey Evidence7
“The general indicators of the defining characteristics of bubbles were fairly strong in 2003. However, they were generally less strong than in 1988 in the glamor cities and stronger than in 1988 in
Milwaukee.“