What Will it Take to Restore the Housing Market?

26 Pages Posted: 11 Mar 2009

See all articles by William C. Wheaton

William C. Wheaton

Massachusetts Institute of Technology (MIT) - Department of Economics

Gleb Nechayev

CBRE Econometric Advisors

Date Written: March 1, 2009

Abstract

This paper examines the causes of the run up in house prices between 1998 and 2006 and the subsequent fall. It is argued that two unique factors have been at work: a true "bubble" in 2nd homes, and a fundamental expansion and now contraction of mortgage credit availability. These "new" factors render traditional econometric forecasting relatively useless in judging where markets will go in the future. Instead the paper relies on theory - suggesting that a recovery in sales and an accompanying reduction in the for-sale inventory are both necessary and sufficient to restore price stability and then growth. The paper shows that the relationships between sales, prices and the inventory are complicated and reviews recent econometric evidence about them. A recovery in prices will require (1) renewed purchases of housing by 1st time buyers as well as investors, (2) several years more of record low construction, and (3) some form of amelioration or resolution of foreclosures.

Keywords: Housing

JEL Classification: R2

Suggested Citation

Wheaton, William C. and Nechayev, Gleb, What Will it Take to Restore the Housing Market? (March 1, 2009). MIT Department of Economics Working Paper No. 09-06, Available at SSRN: https://ssrn.com/abstract=1356243 or http://dx.doi.org/10.2139/ssrn.1356243

William C. Wheaton (Contact Author)

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

50 Memorial Drive
E52-252B
Cambridge, MA 02142
United States
617-253-1723 (Phone)
617-253-1330 (Fax)

Gleb Nechayev

CBRE Econometric Advisors ( email )

260 Franklin Street
Suite 400
Boston, MA 02110
United States

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