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Case / Shiller “Is There a Bubble in the Housing Market”

Case / Shiller “Is There a Bubble in the Housing Market”. Vaughan / Economics 639. “Is There a Bubble in the Housing Market”. Paper written in 2003 (during housing bubble). Answer : Yes. Housing Bubble .

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Case / Shiller “Is There a Bubble in the Housing Market”

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  1. Case / Shiller“Is There a Bubble in the Housing Market” Vaughan / Economics 639

  2. “Is There a Bubble in the Housing Market” • Paper written in 2003 (during housing bubble). • Answer: Yes

  3. Housing 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

  4. Empirical 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.

  5. Survey • Replicate 1988 survey of recent home buyers. • Four housing markets • Orange County, CA (Suburban LA) – hot market • Alameda County, CA (Suburban SF) – hot 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.

  6. Survey 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.

  7. Survey Evidence “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.“

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