Abstract

http://ssrn.com/abstract=1264048
 
 

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What Drives Housing Prices?


James A. Kahn


Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

September 2008

FRB of New York Staff Report No. 345

Abstract:     
This paper develops a growth model with land, housing services, and other goods that is capable of explaining a substantial portion of the movements in housing prices over the past forty years. Under certainty, the model exhibits a balanced aggregate growth, but with underlying sectoral change. The paper introduces a Markov regime-switching specification for productivity growth in the nonhousing sector and shows that such regime switches are a plausible candidate for explaining - both qualitatively and quantitatively - the large low-frequency changes in housing price trends. In particular, the model shows how housing prices can have a bubbly appearance in which housing wealth rises faster than income for an extended period, then collapses and experiences an extended decline. The paper also uses micro data to calibrate a key cross-elasticity parameter that governs the relationship between productivity growth and home price appreciation. Combined with a realistic model of learning about the productivity process, the model is able to capture the medium- and low-frequency fluctuations of both price and quantity from the residential sector. Finally, the model suggests that the current downturn in the housing sector was triggered by a productivity slowdown that may have begun in 2004, an event that could reasonably have been viewed as highly unlikely by investors and mortgage issuers in the early part of the decade.

Number of Pages in PDF File: 44

Keywords: housing prices, residential investment, productivity growth

JEL Classification: E22, E32, O41, O51

working papers series





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Date posted: September 7, 2008  

Suggested Citation

Kahn, James A., What Drives Housing Prices? (September 2008). FRB of New York Staff Report No. 345. Available at SSRN: http://ssrn.com/abstract=1264048 or http://dx.doi.org/10.2139/ssrn.1264048

Contact Information

James A. Kahn (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-1948 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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