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Price Expectations and the U.S. Housing Boom, Pascal Towbin, Sebastian Weber

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Abstract
Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals
Table Of Contents
Cover -- Contents -- I: Introduction -- II: Empirical Framework -- A: Model and Data -- B: Identification -- C: Computational Implementation -- III: Results -- A: Impulse Response Functions -- B: Contribution of Price Expectation Shocks to the Housing Boom And Bust -- C: Forecast Error Variance Decomposition -- D: Comparison of Price Expectation Shocks with Surveys about Price Expectations -- E: Realistic versus Unrealistic Price Expectation Shocks -- IV: Robustness -- A: Alternative Summary Measures of the Set of Accepted Impulse Responses -- B: Different Sample Length, Lag Length, and Trends -- C: Accounting for Shocks to LTV Standards -- D: Alternative Price Measures -- V: Conclusion -- References -- Annexes -- Figures -- 1 Evolution of Variables over Time -- 2 Baseline Model: Impulse Response Functions -- 3 Historical Decomposition of Real House Price Developments -- 4 Survey-based Expectations versus Model-based Expectations -- 5 NPV[sub(0),sub(T)] for Expanding Investment Horizon -- 6 Realistic and Unrealistic Price Expectation Shocks: Impulse Response Functions -- 7 Realistic and Unrealistic Price Expectation Shocks: Historical Decomposition -- 8 Historical Contribution of Price Expectation Shock to Real House Price Developments -- Tables -- 1 Baseline Shock Identification -- 2 Contribution of Shocks to Price Boom and Bust -- 3 Variance Decomposition -- 4 Correlation of Model-based Expectation Measure (t) with Survey-based Measure (t+i) -- 5 Contribution of Shocks to Price Boom, Alternative Models -- 6 Shock Identification including LTV Shock
Language
eng
Literary Form
non fiction
Physical Description
1 online resource (36 pages)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781513522074

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