Chasing Trends in the U.S. Housing Market

46 Pages Posted: 20 Jan 2010 Last revised: 2 Mar 2011

See all articles by Roy Kouwenberg

Roy Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: February 2011

Abstract

In this paper we develop and estimate a behavioral model with boundedly rational investors for the U.S. housing market. There are two groups of investors, fundamentalists and chartists. Fundamentalists expect the house price to revert to its fundamental value based on rents, while chartists extrapolate past price trends. Investors are allowed to switch between groups conditional on recent performance. The estimation results show that fundamentalists and chartists are usually present in the market with roughly equal proportions. From 1992 until 2005, however, the proportion of chartists in the market was substantially above the long-term average, such that the house price level climbed far above its fundamental value. In an out-of-sample assessment the model outperforms competing time-series models and predicts the decline of the housing market from 2006 onwards. Finally, the estimated model generates boom-bust price cycles endogenously.

Keywords: Housing market, behavioral finance, heterogeneous agents, bubbles

JEL Classification: G17, R31, G12

Suggested Citation

Kouwenberg, Roy R. P. and Zwinkels, Remco C.J., Chasing Trends in the U.S. Housing Market (February 2011). Available at SSRN: https://ssrn.com/abstract=1539475 or http://dx.doi.org/10.2139/ssrn.1539475

Roy R. P. Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kouwenberg

Mahidol University - College of Management ( email )

69 Vipawadee Rangsit Road
Bangkok, 10400
Thailand

HOME PAGE: http://www.cmmu.mahidol.ac.th/main/faculty/aroy.asp

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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