Trend Growth Expectations and Us House Prices Before and after the Crisis

48 Pages Posted: 21 Jun 2016

See all articles by Mathias Hoffmann

Mathias Hoffmann

Deutsche Bundesbank

Michael U. Krause

University of Cologne

Thomas Laubach

Goethe University Frankfurt

Date Written: 2012

Abstract

We provide an analysis that might help distinguish rationally justified movements in house prices from potentially non-rational movements, using a two-sector business cycle model, in which investment in housing is subject to collateral constraints. A large portion of the evolution of U.S. house prices during the past 20 years can be reproduced when expectations of future income growth as published in surveys are used as an input into the model. Changes in growth expectations translate into corresponding changes in house prices, since the value of housing must be linked to expected aggregate income. Only since about 2005 do actual and model-implied house prices clearly diverge, calling for explanations not based on economic fundamentals.

Keywords: House prices, trend growth, Kalman filter, real-time data, borrowing constraints

JEL Classification: E13, E32, D83, O40

Suggested Citation

Hoffmann, Mathias and Krause, Michael U. and Laubach, Thomas, Trend Growth Expectations and Us House Prices Before and after the Crisis (2012). Bundesbank Discussion Paper No. 12/2012. Available at SSRN: https://ssrn.com/abstract=2796864

Mathias Hoffmann (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Michael U. Krause

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Thomas Laubach

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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