The 1998-2005 Housing 'Bubble' and the Current 'Correction': What's Different this Time?

26 Pages Posted: 14 Dec 2007 Last revised: 30 Dec 2008

See all articles by William C. Wheaton

William C. Wheaton

Massachusetts Institute of Technology (MIT) - Department of Economics

Gleb Nechayev

CBRE Econometric Advisors

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Abstract

This paper examines the inflation in housing prices between 1998 and 2005 and investigates whether this run-up in prices can be explained by increases in demand fundamentals such as population, income growth, and the decline in interest rates over this period. Time series models are estimated for 59 MSA markets and price changes from 1998 to 2005 are dynamically forecast using actual economic fundamentals to drive the models. In all 59 markets, the growth in fundamentals from 1998 to 2005 forecasts price growth that is far below that which actually occurred. An examination of the 2005 forecast errors reveals they are greater in larger MSAs, in MSAs where second home and speculative buying was prevalent, and in MSAs where indicators suggest the sub-prime mortgage market was most active. These latter factors are unique to the recent housing market and hence make it difficult to asses if and how far housing prices will correct after 2005.

Keywords: inflation, housing prices, housing bubble, demand fundamentals, economic fundamentals

Suggested Citation

Wheaton, William C. and Nechayev, Gleb, The 1998-2005 Housing 'Bubble' and the Current 'Correction': What's Different this Time?. Journal of Real Estate Research, Vol. 30, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1071044

William C. Wheaton (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Cambridge, MA 02142
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617-253-1723 (Phone)
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Gleb Nechayev

CBRE Econometric Advisors ( email )

260 Franklin Street
Suite 400
Boston, MA 02110
United States

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