Housing Bubbles

55 Pages Posted: 2 Sep 2014 Last revised: 7 May 2015

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Charles Nathanson

Northwestern University - Kellogg School of Management

Date Written: August 2014


Housing markets experience substantial price volatility, short term price change momentum and mean reversion of prices over the long run. Together these features, particularly at their most extreme, produce the classic shape of an asset bubble. In this paper, we review the stylized facts of housing bubbles and discuss theories that can potentially explain events like the boom-bust cycles of the 2000s. One set of theories assumes rationality and uses idiosyncratic features of the housing market, such as intensive search and short selling constraints, to explain the stylized facts. Cheap credit provides a particularly common rationalization for price booms, but temporary periods of low interest rates will not explain massive price swings in simple rational models. An incorrectly under-priced default option is needed to explain the formation of rational bubbles. Many non-rational explanations for real estate bubbles exist, but the most promising theories emphasize some form of trend-chasing, which in turn reflects boundedly rational learning.

Suggested Citation

Glaeser, Edward L. and Nathanson, Charles, Housing Bubbles (August 2014). NBER Working Paper No. w20426. Available at SSRN: https://ssrn.com/abstract=2490304

Edward L. Glaeser (Contact Author)

Harvard University - Department of Economics ( email )

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Charles Nathanson

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