The Role of People’s Expectation in the Recent US Housing Boom and Bust

This paper investigates how an important driver of the recent housing boom and bust, people’s expectation, influences housing asset returns. Specifically, it extends the volatility feedback model to study the relationship between housing volatility and asset returns during 19632007. The analysis considers two alternative breakpoints, 1984Q1 and 1999Q1, in order to distinguish the permanent structural break from temporary Markov-switching volatility. The novelty of this study lies in its insightful investigations into the recent U.S. housing boom and bust in the post-1999 period in four dimensions. First, the significantly negative volatility feedback effect in the housing market suggests a positive relationship between housing volatility and expected asset returns, and highly supports the important role of people’s expectations in the recent housing boom and bust. Second, the high-volatility regimes of the housing market delivered by this study indicate a strong association between housing cycles and business cycles, as well as a remarkable uncertainty in the U.S. housing market after the recession 2001. Third, the violated fundamental which refers to the broken negative relationship between housing volatility and realized asset returns during 2001–2004 implies the possible presence of a housing bubble during this period. Finally, volatility feedback anticipates the recent bubble-like housing market dynamics because high volatility during 2002–2003 implies low realized returns in the early housing-boom stage (2002–2003), as well as high expected returns in the second stage of the housing boom (2004–2005).     

Twin Booms: The Lead–Lag Relation Between Credit and Housing Booms

In this study, we examine the causal relation between credit (proxied by credit-to-GDP ratio) and house markets (proxied by house price index) using data of using thirty-six countries for the period 1996–2012. We find a bidirectional causal relation between the two markets using the whole sample. Then, we find that during the non–twin boom period, the results are the same as those using the whole sample. During the twin boom periods, the two markets are not linked using the boom definition of deviation from the trend, and the housing market leads the credit market using the boom definition of the growth rate exceeding a certain 15 percent.     

Explaining House Price Dynamics: Isolating the Role of Nonfundamentals

This paper examines the role of nonfundamentals‐based sentiment in house price dynamics, including the well‐documented volatility and persistence of house prices during booms and busts. To measure and isolate sentiment's effect, we employ survey‐based indicators that proxy for the sentiment of three major agents in housing markets: home buyers (demand side), home builders (supply side), and lenders (credit suppliers). After orthogonalizing each sentiment measure against a broad set of fundamental variables, we find strong and consistent evidence that the changing sentiment of all three sets of market participants predicts house price appreciation in subsequent quarters, above and beyond the impact of changes in lagged price changes, fundamentals, and market liquidity. More specifically, a one‐standard‐deviation shock to market sentiment is associated with a 32–57 basis point increase in real house price appreciation over the next two quarters. These price effects are large relative to the average real price appreciation of 71 basis points per quarter observed over the full sample period. Moreover, housing market sentiment and its effect on real house prices is highly persistent. The results also reveal that the dynamic relation between sentiment and house prices can create feedback effects that contribute to the persistence typically observed in house price movements during boom and bust cycles.     

The Asymmetric Wealth Effect in the US Housing and Stock Markets: Evidence from the Threshold Cointegration Model

Previous studies commonly use a linear framework to investigate the long-run equilibrium relationship between the housing and stock markets. The linear approaches may not be appropriate if adjustments from disequilibrium are asymmetric in both markets. Nonlinear adjustments are likely to be observed since the two markets respond rather differently to negative shocks where the stock market is more volatile but price rigidity is found in the housing market. In this paper, we firstly propose two hypotheses on the long-run equilibrium relationship of the US housing and stock markets, and then employ the threshold cointegration model to investigate the potential asymmetric relationships between the two markets. Our empirical results reveal that cointegration exists among the markets, but adjustments toward its long-run equilibrium are asymmetric. Further evidence points out that a rapid mean reversion occurs in one regime where the stock price outperforms the housing price, and no significant reversion is found in the other regime, supporting the hypothesis of the existence of an asymmetric wealth effect among the two markets in the US. Furthermore, evidence from the asymmetric vector error correction model shows that significant error corrections toward the equilibrium exist in the short run only when the stock price exceeds the real estate price by the estimated threshold level, reassuring the finding of the asymmetric wealth effect.     

Speculation and price bubbles in the Korean and Japanese real estate markets

This article investigates the possibility of speculation having caused the prices of land and housing to deviate from their given long-run equilibrium levels in Korea and Japan. We modeled speculation by incorporating the expected future price into the demand equation. The existence of growing rational bubbles was tested on Korean and Japanese data using the standard econometric technique for estimating linear rational expectations models. Our analysis of the Korean annual data suggests that a growing rationale bubble existed during the 1974–1989 period, nominal or real. Estimation results of the same model using Japanese annual data also confirmed the existence of a bubble in land price. Contrary to our analysis of land price data, the evidence of the bubble was much less obvious in Korean annual housing price data. We therefore estimated the model using quarterly data and found that the existence of a bubble could not be established in housing prices. This finding was also consistent with the trend of the rent-to-value ratio series in apartment units. Our results need to be taken with caution because our approach suffers from the common econometric problem of possible mis-specification of the model and because of the small size of the sample.     

Information shares in a two-tier FX market

Using several measures of information share, we examine price discovery across the inter-dealer and dealer–customer market tiers in the currencies market. In the spot market, the information share of the inter-dealer tier is higher than that of the dealer–customer one for non-financial sector trades and is lower than the dealer–customer tier for foreign investors’ sell trades. In the forward market, the dealer–customer tier generally has the greater information share at the dealer’s buy side. Our results indicate the market where customers’ trades are the most informative and demonstrate how exogenous events affect price discovery across markets and market tiers.     

Risk diversification gains from metropolitan housing assets

The study analyzes the roles of metropolitan housing assets in risk diversification by assessing intertemporal hedging demands for multi‐asset portfolios, which include metropolitan houses, REITs, stocks, bonds, and riskless assets. Investors substitute housing assets in high‐population MSAs with those in low‐population cities, and they switch their holdings of housing assets to less risky bonds in the 2007–2008 housing bust. The findings from the multi‐period portfolio choice problem provide evidence for momentum reversal since forward‐looking investors substitute bottom metropolitan housing assets for top ones in the housing boom, and the GTTB index and the lagged REIT price return have negative impacts on various asset returns.     

Macroprudential Policies and Housing Prices: A New Database and Empirical Evidence for Central,Eastern, and Southeastern Europe

Several countries in Central, Eastern, and Southeastern Europe used a rich set of prudential instruments during the recent credit and housing boom and bust cycles. We construct a comprehensive database of these policy measures covering 16 countries at a quarterly frequency. We use this database to investigate whether the policy measures had an impact on housing price inflation. The measures that appeared to be effective were capital measures (minimum capital adequacy ratio, maximum ratio of lending to households to share capital) and nonstandard liquidity measures (marginal reserve requirements (MRRs) on foreign funding, MRRs linked to credit growth).     

Understanding Housing Market Volatility

The Campbell–Shiller present value formula implies a factor structure for the price–rent ratio of housing market. Using a dynamic factor model, we decompose the price–rent ratios of 23 major housing markets into a national factor and independent local factors, and we link these factors to the economic fundamentals of the housing markets. We find that a large fraction of housing market volatility is local and that the national factor has become more important than local factors in driving housing market volatility since 1999, consistent with the findings in Del Negro and Otrok (2007). The local volatilities mostly are due to time variations of idiosyncratic housing market risk premia, not local growth. At the aggregate level, the growth and interest rate factors jointly account for less than half of the total variation in the price–rent ratio. The rest is due to the aggregate housing market risk premium and a pricing error. We find evidence that the pricing error is related to money illusion, especially at the onset of the recent housing market bubble. The rapid rise in housing prices prior to the 2008 financial crisis was accompanied by both a large increase in the pricing error and a large decrease in the housing market risk premium.     

House prices,bank instability,and economic growth: Evidence from the threshold model

This paper examines the effects of house prices on bank instability when gauged at various levels of income growth. Bank stability may respond differently to house price changes or deviations from fundamental values in an economic boom environment than in a bust circumstance. A threshold estimation technique developed by Hansen (1999) is applied to a panel of 286 U.S. Metropolitan Statistical Areas (MSAs) over the period 1990Q1–2010Q4. We consider two house price indicators: the house price changes and the house price deviations from long-run equilibrium. The results suggest the existence of income growth threshold effects in the relationship between house prices and bank instability. Specifically, there are two income growth thresholds when using the house price changes and one income growth threshold when the house price deviations are applied. Robustness results using the non-MSAs sample from 1995Q1 to 2010Q4 provide further evidence of income growth threshold effects.     

Do Thai stock prices deviate from fundamental values?

The stock market in Thailand experienced several apparent boom and bust cycles in recent years, which raises the question of whether equity prices in Thailand reflect their fundamental values. This paper examines whether the Thai equity market was characterized by rational expectations bubbles over the sample period from June 1975 to June 2006. The cointegration test provides evidence of no long-run relationship among prices, dividends and earnings, indicating the presence of a rational bubble. The results are confirmed by the non-parametric duration dependence test, which shows evidence of negative duration dependence in runs of positive returns, consistent with the presence of rational expectations bubbles. Further analysis reveals departures from fundamental values in the initial sample subperiod ending with the Asian financial crisis in 1997. However, prices appear to be in line with fundamentals in the more recent post-1997 subperiod.     

From Origination to Renegotiation: A Comparison of Portfolio and Securitized Commercial Real Estate Loans

We examine long-run house price convergence across the twenty Paris districts using a quarterly dataset that spans from 1991 to 2014. Our approach is based on two stages. In the first stage, we apply methods of unit root testing. Our econometric modelling exercise adopts a pair wise approach that is built on a probabilistic test for convergence based on all house price differentials across the Paris districts. We find that more than 50 % of the intra-city house price differentials that can be computed are stationary. In the second stage of our investigation, we analyse the drivers of convergence. The probability of stationarity is negatively affected by unemployment differentials across districts, demographics differentials and supply-side characteristics. Our findings further reveal that the half-life of a shock to long-run price equilibrium is affected positively by unemployment, distance and housing supply. Our analysis suggests that smaller distances between Parisian districts are associated with a faster speed of adjustment back towards long-run equilibrium.     

Multiperiod Loans,Occasionally Binding Constraints,and Monetary Policy: A Quantitative Evaluation

We introduce multiperiod mortgage loans, fixed interest rate, a lower bound constraint on newly granted loans, and a possibly slack collateral constraint, in an otherwise standard Dynamic Stochastic General Equilibrium (DSGE) model with housing. Our nonlinear estimation shows that all those features are important to understand the evolution of mortgage debt during the recent U.S. housing market boom and bust. The transmission of monetary policy becomes dependent on the housing cycle, with weaker effects when house prices are high or start falling sharply. Higher average loan duration makes monetary policy less effective, eventually leading to asymmetric responses to positive and negative monetary shocks.     

An Empirical Analysis of Residential Property Flipping

Beginning with a time-dependent definition of a house flip, the analysis examines flipping activity in Las Vegas from 1994 through mid-2007. We find that flip homes tend to be older and smaller than non-flip homes. Moreover, as the residential property market in Las Vegas begins to take off, flip homes become a more significant percentage of total sales. At the height of the housing boom in 2004, a typical flip produces an annual rate of return exceeding 60%. Even after adjusting for opportunity costs, this translates to economic profits of nearly 20%. However, shortly thereafter, the frenetic pace of the market begins to subside, and by 2007, economic returns to a flip fall to 0.     

Time to build and the real-options channel of residential investment

A standard real-options model predicts that time-to-build investment could be delayed by uncertainty over future revenue. We quantify the first-order importance of this mechanism in the 2002–2011 housing boom-bust cycle by developing and estimating a model of sequential irreversible investment with stochastic bottlenecks. We find that the main driver of construction delays during the boom is construction bottlenecks. However, further delay in construction during the bust is caused by an increase in uncertainty, which grew by 21.6% between 2002 and 2009. The model can account for more than one-third of the decline in residential investment between 2002 and 2009.     

A Dynamic Model of the Housing Market: The Role of Vacancies

While the hedonic property value model and recently developed computable general equilibrium urban models assume the housing market is in equilibrium, recent years have witnessed extreme circumstances such as large changes in housing prices, high levels of mortgage default, and high levels of foreclosure that bring into question this assumption. This highlights the need for a better understanding of the dynamics of the housing market and the mechanisms that drive and sustain periods of disequilibrium. In this analysis, I develop a dynamic model of the housing market where vacancies naturally arise as the error correction mechanism. I estimate this model using annual U.S. panel data at the MSA level for 1990–2011. The results show that when there is excess demand, prices rise when vacancies fall but prices do not fall when there is excess supply and vacancies rise. This is consistent with the belief that prices are sticky downwards and hence prolong housing downturns. On the other hand, when there is excess supply, there is a relatively stronger decline in new housing in response to a rise in vacancies and much less of a new housing reaction when there is excess demand and vacancies fall. Furthermore, when I allow for a structural shift in the housing market brought on by the Great Recession (2006–2011), I find that the housing market became more responsive on both sides – excess supply and demand – during this period.     

Financial Markets and Investment Externalities

This address explores the link between financial market shocks, investment choices, and various externalities that can arise from these choices. My analysis, which emphasizes differences between shocks to debt and equity markets, provides insights about some stylized facts from the macro finance literature. These insights are illustrated with a discussion of the technology boom and bust in the late 1990s and early 2000s, and the housing boom and bust in the mid‐2000s.     

After the tide: Commodity currencies and global trade

The decade prior to the Great Recession saw a boom in global trade and rising transportation costs. High-yielding commodity exporters׳ currencies appreciated, boosting carry trade profits. The Global Recession sharply reversed these trends. We interpret these facts with a two-country general equilibrium model that features specialization in production and endogenous fluctuations in trade costs. Slow adjustment in the shipping sector generates boom–bust cycles in freight rates and, as a consequence, in currency risk premia. We validate these predictions using global shipping data. Our calibrated model explains about 57% of the narrowing of interest rate differentials post-crisis.     

House‐Price Expectations,Alternative Mortgage Products,and Default

The goal of this paper is to better understand the forces that spurred use of alternative mortgages during the housing boom. A theoretical model shows that, when future house‐price expectations become more favorable, reducing default concerns, mortgage choices shift toward alternative products, which are characterized by backloading of payments. The empirical work confirms this prediction by showing that an increase in past house‐price appreciation, which captures more favorable expectations for the future, raises the market share of alternative mortgages. In addition, the paper tests the fundamental presumption that backloaded mortgages are more likely to default, finding support for this view.     

Alternative Methods of Increasing the Precision of Weighted Repeat Sales House Prices Indices

Weighted repeat sales house price indices have become one of the primary indicators used to identify housing market conditions and to estimate the amount of equity homeowners have gained through house price appreciation. The primary reason for the acceptance of this methodology is that it derives a location specific (typically, census division, state or metropolitan area) average change in house prices from repeated observations of individual house prices. It is this repeat attribute that allows repeat sales price indices to claim that it is a preferable index which does a better job of holding quality constant. The amount of time between the two observed prices for a single property is determined by when the home transacts. Some homes transact twice in a period of months and others do not transact for decades. It is likely that individual house price appreciation rates vary from the mean appreciation rate, as estimated by the index, in a systematic fashion. In general, the longer the time between transactions the more variance there is in individual house price appreciation. This paper extends this concept to include new dimensions. For instance, houses that appreciate faster than the mean, as estimated by the index for that location, may experience a different variation structure than homes that appreciate slower. This process can be viewed as an asymmetric treatment of the variance of house price appreciation around the estimated index. In addition, the variance of expensive and affordable homes may also be different and time varying. This paper finds evidence that adding the dimensions of price tiers and asymmetry to the variance estimate has merit and does affect the estimated index as well as homeowner equity estimates. Homeowner equity estimates are especially sensitive to these added dimensions because they depend on both the revised index and the estimated variances, which are specific to each dimension considered—time between transaction, asymmetry, and price tier.