A Worm's Eye View of the Bubble
35 Pages Posted: 30 Jun 2008
Date Written: June 27, 2008
This paper investigates property sales in one established lower-middle-income suburban neighborhood of Washington, DC, between 2000 and 2007, a period during which neighborhood house prices tripled, substantially exceeding appreciation in the overall region, which itself fully participated in the national housing bubble.
The goal is to determine (1) whether the behavior of prices and quantities should have unambiguously signaled the emergence of a bubble, and (2) whether the behavior of two identifiable subgroups of buyers differed from the overall trend. Hispanics are of interest because they would have been more likely than Anglo-surnamed to obtain subprime financing for their purchases. Landlords are of interest because it is widely believed that soaring price-to-rent ratios are a hallmark of bubbles.
During the bubble sales volume doubled and seasonality disappeared. Hispanics paid on average 5 percent ($12,000) more than other buyers for equivalent houses at any given time; landlords did not. Hispanic buyers rushed suddenly into the market and suddenly receded, while landlord purchases have no apparent trend. The Hispanic premium is the most striking finding and is probably connected with weak appraiser independence in subprime finance. Other possible diagnostic tests for bubble behavior do not work in these data.
Keywords: house prices, bubbles, hedonic, appraisal, Hispanic, subprime
JEL Classification: R21
Suggested Citation: Suggested Citation