Fundamentals, Feedback Trading, and Housing Market Speculation: Evidence from California

Housing market researchers have long suspected that the market for single family homes is not efficient. The apparent predictability in housing prices, at least in the short run, leaves open the possibility of speculative purchases in the housing market. The purpose of this paper is to investigate the relative influence of speculative and economic demand on median house price on the Santa Barbara South Coast. An empirical model is presented that allows for decomposition of house price appreciation into that driven by economic and demographic forces and that resulting from speculative demand. The decomposition reveals a speculative bubble in the housing market forming in late 1987 and collapsing in mid 1990.