Intrinsic and Rational Speculative Bubbles in the US Housing Market: 1960–2011

Abstract

This paper examines the dynamics of the residential property market in the US between 1960 and 2011. Given the cyclicality and apparent overvaluation of the market over this period, we determine whether deviations of real estate prices from their fundamentals were caused by the existence of two genres of bubbles: intrinsic bubbles and rational speculative bubbles. We find evidence of an intrinsic bubble in the market pre-2000, implying that overreaction to changes in rents contributed to the overvaluation of real estate prices. However, using a regime switching model, we find evidence of periodically collapsing rational bubbles in the post-2000 market.

Keywords: intrinsic bubbles, rational bubbles, rents, US residential real estate market

JEL Classification: G12, R21