U.S. House Prices: The Role of Fundamentals

33 Pages Posted: 27 May 2011 Last revised: 24 Apr 2012

See all articles by Lewis T. Evans

Lewis T. Evans

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR)

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: April 24, 2012

Abstract

This paper uses a competitive-equilibrium housing-market model to evaluate the role that interest rates played in the U.S. housing boom and bust. The model features stochastic construction costs, disposable income, interest rates, and population, and endogenously determines the supply of developed land and house prices. It is calibrated separately to 95 cities and data on the four state variables alone are used to calculate house prices implied by fundamentals for each city. Actual prices during 1995-2010 closely match the predicted prices implied by observed changes in the four state variables and reasonably small perceived changes in the long-run average levels of interest rates and demand growth rates.

Keywords: housing markets, rational prices, bubbles, real options

JEL Classification: R31, E22, G12, D51

Suggested Citation

Evans, Lewis T. and Guthrie, Graeme, U.S. House Prices: The Role of Fundamentals (April 24, 2012). Available at SSRN: https://ssrn.com/abstract=1852186 or http://dx.doi.org/10.2139/ssrn.1852186

Lewis T. Evans

Victoria University of Wellington - New Zealand Institute for Study of Competition and Regulation Inc. (ISCR) ( email )

Wellington 6001
New Zealand
64 4 4635562 (Phone)
64 4 4635566 (Fax)

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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