Momentum and House Price Growth in the United States: Anatomy of a Bubble

This article analyzes the bubble in property values across cities in the United States from 1999 through 2005. We find evidence of momentum in house price growth (relative to growth in rents) away from the underlying fundamentals throughout the 1980–2005 period; however, momentum increased after 1999. We find that the bubble happened mostly after 2003; it was for a relatively short period and was characterized by a series of positive, seemingly random, shocks that were associated with the surge in the subprime market and the decline in short‐term interest rates. Before that price changes were reasonably well explained by the fundamentals, particularly the decline in long‐term interest rates in the early part of the bubble period. We do not find evidence of a tendency for prices relative to rents to revert to a long‐run trend.     

Economic Policy Uncertainty and House Prices: Evidence from Geographical Regions of England and Wales

This article empirically investigates the effect of the economic policy uncertainty on house prices across 10 different geographical regions of England and Wales. The empirical study is conducted by means of the autoregressive distributed lag bounds cointegration test. Results show a stable long‐run relationship (cointegration) between house prices and its determinants (including economic policy uncertainty) in nine of the regions. Results also evince long‐ and short‐term negative effect of uncertainty to house prices. These results clearly indicate the importance of economic policy uncertainty in the determination of UK house prices and demand.     

Testing for Cointegration between House Prices and Economic Fundamentals

Economic theory predicts three possibilities for the cointegration relationship between house prices and economic fundamentals: linear cointegration, nonlinear cointegration and no cointegration. In contrast, the empirical literature has only examined linear cointegration. This article argues that ignoring nonlinear cointegration may lead to misleading conclusions that no cointegration exists between house prices and the fundamentals. To illustrate this point, I test for cointegration for ten U.S. cities and find that only one city shows evidence of linear cointegration. Further analysis using the two‐step testing procedure yields evidence of nonlinear cointegration for six other cities. Still, there are three cities left out without evidence of nonlinear cointegration. Further studies are needed to test for other forms of nonlinear cointegration before a conclusion of no cointegration can be reached for the remaining three cities.     

Asset Characteristics and Boom and Bust Periods: An Experimental Study

We examine the impact of transaction costs, short selling restrictions and divisibility of assets on market efficiency in experimental asset markets. We find that transaction costs do not exacerbate the inefficiency of the market. They reduce the magnitude of bubbles and push prices closer to fundamentals. More divisible assets exhibit smaller deviations of prices from fundamentals. Short selling restrictions contribute to prolonged bubbles, while relaxing them increases the occurrence of “bust cycles.” We also find that experimental real estate markets display larger deviations of prices from fundamental values, longer boom and bust cycles and smaller turnover than experimental financial markets.     

Oil Prices and Urban Housing Demand

We develop a model of a monocentric, oil‐exporting city. The model predicts a “twist” (rotation combined with a level shift) of the house price gradient with an oil price change due to the combined producer price and transportation cost effects. Empirical findings support the predictions, with house price changes positively linked to the price of oil in cities specialized in oil and gas‐related industries, and negatively linked in suburban areas of all cities. These results quantify the large and differential risks to house prices associated with oil price changes both within and across cities. Overall, estimates suggest a 50% change in the price of oil results in a city‐wide house price change of 15% over five years in a city specialized in the production of oil (export employment share of 50%), whereas house prices for units greater than 15 miles from the city‐center change in relative terms by ?1.5% over the same period.     

Amenity‐Based Housing Affordability Indexes

The recent slump notwithstanding, substantial increases in house prices in many parts of the United States have served to highlight housing affordability for moderate‐income households, especially in high‐cost, supply‐constrained coastal cities such as Boston. In this article, we develop a new measure of area affordability that characterizes the supply of housing that is affordable to different households in different locations of a metropolitan region. Key to our approach is the explicit recognition that the price/rent of a dwelling is affected by its location. Hence, we develop an affordability methodology that accounts for job accessibility, school quality and safety. This allows us to produce a menu of town‐level indexes of adjusted housing affordability. The adjustments are based on obtaining implicit prices of these amenities from a hedonic price equation. We thus use data from a wide variety of sources to rank 141 towns in the greater Boston metropolitan area based on their adjusted affordability. Taking households earning 80% of area median income as an example, we find that consideration of town‐level amenities leads to major changes relative to a typical assessment of affordability.     

Do House Price Levels Anticipate Subsequent Price Changes within Metropolitan Areas?

This research examines the relationship between hedonically controlled housing price levels and subsequent changes in those prices across locations within MSAs. Are areas with a high price relative to an “imputed rent” paying for higher appreciation? In an efficient market (e.g., Gordon Growth Model), as fundamentals (impute rent) differ across locations and change over time, anticipation of these should generate a positive correlation between (residual) price levels and subsequent price changes. We undertake these tests in four different MSAs using a panel of repeat‐sale house price indices that have been scaled to price levels with the hedonic attributes of the house and ZIP code. In three markets we find that identical houses in higher priced ZIP codes subsequently appreciate faster. In one market we find that there is little statistical difference.     

The Accuracy of Owner-Provided House Values: The 1978–1991 American Housing Survey

The American Housing Survey (AHS) includes the owner's valuation of the house as a measure of the house's value. If owner-stated values are accurate, the AHS (as well as other survey instruments) can be used by researchers studying a variety of topics. In this study we use the metropolitan version of the AHS for three cities over fourteen years to compare owners' valuations with sales prices of houses that sold in the twelve months prior to an interview. We find that, on average, recent buyers report house values that are 8.4% higher than the stated sales prices. Further analysis indicates that these recent buyers, when compared with owners with longer tenure, overvalue their houses by 3.3%, on average. Thus, we find that the average owner overvalues his house by 5.1%. Also, differences between sales prices and owners' valuations are not related to particular characteristics of the house, occupants (other than length of tenure), or neighborhood. Thus, the use of the owners' valuations will result in accurate estimates of house price indexes and will provide reliable estimates of the prices of house and neighborhood characteristics.     

Local House Price Dynamics: New Indices and Stylized Facts

We introduce the first publicly available data set of constant‐quality house price indices for counties, ZIP codes and census tracts in the United States, at an annual frequency, over a 40‐year period. Between 1990 and 2015, house price gradients within large cities steepen, documenting a reversal of decades of increasing relative desirability of suburban locations. Real house prices are more likely to be nonstationary near the centers of large cities. Within‐city differences in house price appreciation at the ZIP code level are, on average, about half of between‐city differences, though this ratio varies depending on the time period and city size.     

Immigration,Capital Flows and Housing Prices

Research on immigration and real estate has found that immigrants lower house prices in immigrant destination neighborhoods. In this article, we find that this latter result is not globally true. Rather, we show that immigrants can raise neighborhood house prices, at least in the case of the wealthy immigrants that we study. We exploit a surprise suspension and subsequent closure of a popular investor immigration program in Canada to use a difference‐in‐differences methodology comparing wealthy immigrant destination census tracts to nondestination tracts. We find that the unexpected suspension of the program had a negative impact on house prices of 1.7–2.6% in the neighborhoods and market segments most favored by the investor immigrants. This leads to an approximate lower bound on the effect of capital inflows of 5%.     

Price transmission across the U.S. food distribution system

Price transmission models are estimated using recursive methods across 100 food commodities. From the individual commodities, short- and long-run price transmission coefficients are estimated for rising and falling prices. These coefficients are classified into five commodity categories and expressed as one vector while coding for causality, market levels, rising/falling prices, short and long run, and time period. Then the impact of each variable is estimated and inferences are drawn about the degree of price transmission. Results show that price linkages are strong but slightly declining over time, with some evidence of asymmetric behavior. Long-run rising prices are passed through more than long-run falling prices, except for fruits and vegetables.     

A Closer Look at the U.S. Housing Market: Modeling Relationships among Regions

This article investigates the dynamic interactions among nine U.S. regional housing markets by estimating the multivariate cointegration model using both autoregressive (AR) and moving average (MA) representations over the period from 1975 to 2010. Long‐run results indicate that the extent of convergence among the regional housing markets substantially increased over time and more so after the housing bubble burst in the latter part of 2006. Common stochastic trend analysis reveals that the housing regions of New England, Mid‐Atlantic and the Pacific were the primary regional drivers that led the regions toward long‐run equilibrium during the 1975 to 2006 subperiod. Further analysis indicates that the relationships among the regions cannot be attributed to trends in two important macroeconomic fundamentals: regional per capita income and regional GDP. Finally, short‐run analysis reveals substantial lead lag relationships among all the markets.     

Catch Animal Spirits in Auction: Evidence from New Zealand Property Market

Following the animal spirits theory proposed by Akerlof and Shiller, this article contributes to behavior economics by investigating the possibility of using auction sales data to capture evidence of irrational exuberance in the housing market. Using the monthly percentages of residential property auction sales for Auckland, Wellington and Christchurch regions in New Zealand from 2006 to 2015, and the exuberance testing method proposed by Phillips, Shi and Yu, we find that animal spirits have been developing in the Auckland housing market since 2013, but not in other regions. When compared to the results based on price‐to‐rent ratios, auction sales provide more meaningful results for identifying market‐wide irrational exuberance at an early stage. The causality test on price‐to‐rent ratios and auction sales volume shows that asset prices and animal spirits influence each other in the short run. In the long run, prices have significant effect on animal spirits, but not vice versa.     

House Search Duration in Hot and Cold Residential Markets

This study analyzes the determinants of house search duration of consumption‐driven buyers and individual investors in different housing market environments. We use data from surveys of recent house‐buyers in “hot” and “cold” housing markets in the 2000s housing bubble in California characterized by rising and declining residential house prices, respectively. The average house price and the surveyed geographical area are the same for both periods. Expected house ownership horizon is shown to be an important determinant of the realized search duration in addition to commonly considered housing and buyer characteristics. We find a statistically significant positive effect of it on the time until purchase in both housing price environments for consumption‐driven buyers. We also find that consumption‐driven house purchases were highly pronounced in coastal areas in the hot market and inland areas in the cold market. In contrast, long‐horizon investment activity leads that of consumption activity in those areas. Short‐horizon investors, on the other hand, concentrated their house search activity in inland areas in both housing market environments.     

Housing Supply,Land Costs and Price Adjustment

We analyze relationships between housing supply elasticities, land costs and house price dynamics, contributing three main insights. First, higher housing supply elasticities help contain short‐run price spikes following demand shocks. Second, land price dynamics influence this relationship; supply responses are lessened and house price spikes are exacerbated as land prices increase. Third, we estimate a system of regional equations modeling housing supply using a Tobin's‐q specification (incorporating construction and land costs) and show that regional price dynamics are a function of the region's supply elasticity.     

The Effects of the Interstate Commerce Act on Transport Costs: Evidence from Wheat Prices

There is significant debate over the effect of the Interstate Commerce Act (ICA) on the cost of rail transport to shippers. Taking price differences across locations as proxy for transport costs, we use data on wheat prices before and after the implementation of the ICA to see if the Act led to smaller differences in wheat prices across American cities relative to a control group of European cities. We find that the ICA had no effect on US transport costs; however, it reduced their volatility substantially. This evidence supports the view that the ICA helped stabilize cartel prices after a period of significant price wars.     

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

In this paper we study the effect of price floor regulations on the organization and performance of markets. The standard interpretation of the effects of these policies is concerned with short‐run market distortions associated with excess supply. Since price controls prevent markets from clearing, they lead to higher prices. While this analysis may be correct in the short‐run, it does not consider the dynamic equilibrium consequences of price controls. We demonstrate that price floor regulations can have important long‐run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low‐cost retailers. Moreover, we show that these factors can indirectly lower productivity and possibly even prices. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Québec and show that the policy led to more competition between smaller/less efficient stations. This resulted in lowered sales, and, despite the reduction in efficiency, did not increase prices.     

Rational Expectations, Market Fundamentals and Housing Price Volatility

This paper derives a forward-looking rational expectations house price model and empirically tests its ability to explain short-run fluctuations in real house prices. A novel approach to proxying the imputed rents of owner-occupied housing, as a function of observable housing market fundamentals, is combined with a housing market arbitrage relation to derive a present value model for real house prices. Tests of the rational expectations, nonlinear cross-equation restrictions reject the joint null hypothesis of rational expectations and the asset-based housing price model for quarterly, single-detached house prices in the city of Vancouver, British Columbia from 1979–1991. The model fails to fully capture observed house price dynamics in two real estate booms but tracks real house prices well in less volatile times, suggesting that prices may temporarily deviate from fundamental values in real estate price cycles.     

Contact High: The External Effects of Retail Marijuana Establishments on House Prices

Using publicly available data from the city of Denver and the state of Colorado, this study examines the effects of retail conversions (conversions from medical marijuana to retail marijuana stores) on neighboring house values in Denver, CO. The study period reflects a time before and after retail marijuana sales became legal in Colorado in 2014. Using a difference‐in‐differences approach, we compare houses that were in close proximity to a conversion (within 0.1 miles) to those that are farther away from a conversion. We find that single‐family residences close to a retail conversion increased in value by approximately 8% relative to houses that are located slightly farther away. We perform a battery of robustness checks and falsification tests to provide additional support for this finding. To our knowledge, this is the first study to examine at a microlevel the highly localized effect of retail marijuana establishments on house prices and hope that it can contribute to the debate on retail marijuana laws.     

House Prices and Inflation

The present paper examines the long-run impact of inflation on homeowner equity by investigating the relationship between house prices and the prices of nonhousing goods and services, rather than return series and inflation rates as in previous empirical studies on the inflation hedging ability of real estate. There are two reasons for this methodological departure from prior practice: (1) while the total return on housing cannot be accurately measured, the total return on housing is fully reflected in housing prices, and (2) given that using returns or differencing a time series leads to a loss of long-run information contained in the series, valuable long-run information can be captured by using prices. Also, unlike previous related studies, we exclude housing costs from goods and services prices to avoid potential bias in estimating how inflation affects housing prices. Monthly data series are collected for existing and for new house prices as well as the consumer price index excluding housing costs for the period 1968–2000. Based on both autoregressive distributed lag (ARDL) models and recursive regressions, the empirical results yield estimated Fisher coefficients that are consistently greater than one over the sample period. Thus, we infer that house prices are a stable inflation hedge in the long run.