Abstract

http://ssrn.com/abstract=1348570
 
 

References (34)



 
 

Citations (1)



 


 



Fooled by Search: Housing Prices, Turnover and Bubbles


Brian Michael Peterson


Government of Canada - Bank of Canada

February 11, 2009

CAEPR Working Paper No. 004-2009

Abstract:     
Theory predicts that the effects of search frictions on house prices from temporary movements in demand should be temporary, while the data suggests it is permanent. The latter implies that movements in demand coupled with search frictions create higher volatility in prices than theory would predict, amplifying price changes, leading to bubbles and depressions. To generate permanent price changes from temporary demand shocks, a textbook search model is combined with a behavioral assumption where house buyers and sellers ignore the effects of search frictions on past prices. The estimated model implies that over half of the real price growth from the housing bubble starting in 1998 is due to the behavioral assumption where households are 'Fooled by Search.' When trend growth of prices is removed, the behavioral assumption explains almost three-fourths of the housing bubble. The estimated model also provides several other results. (1) There is a large inefficiency in the search process of the housing market: buyers have very little bargaining power relative to their impact on creating sales, i.e. the Hosios condition is not met by an order of magnitude. (2) There is evidence of a rise in the fundamental value of houses from 1998 to 2005 that mirrors the loose monetary policy under the Greenspan Federal Reserve. (3) Analysis of the boom and bust of the housing market from 1975 to 1982 suggests that buyers who are choosing to not enter the housing market are rational. Using the last observation to make a back of the envelope projection for the current crisis, turnover will have to fall to its 1982 level and remain there until 2011 before a recovery can begin, driving house prices down to their real levels of 2002-2003.

Number of Pages in PDF File: 41

Keywords: House Prices, Search, Turnover, Bubbles

JEL Classification: E3,R2, R21

working papers series


Download This Paper

Date posted: February 25, 2009 ; Last revised: March 19, 2009

Suggested Citation

Peterson, Brian Michael, Fooled by Search: Housing Prices, Turnover and Bubbles (February 11, 2009). CAEPR Working Paper No. 004-2009. Available at SSRN: http://ssrn.com/abstract=1348570 or http://dx.doi.org/10.2139/ssrn.1348570

Contact Information

Brian Michael Peterson (Contact Author)
Government of Canada - Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada
Feedback to SSRN


Paper statistics
Abstract Views: 700
Downloads: 161
Download Rank: 103,509
References:  34
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.422 seconds