U.S. House Prices Over the Last 30 Years: Bubbles, Regime Shifts and Market (In)Efficiency

42 Pages Posted: 19 Apr 2017

See all articles by Rose Neng Lai

Rose Neng Lai

University of Macau

Robert A. Van Order

George Washington University

Multiple version iconThere are 2 versions of this paper

Date Written: Summer 2017

Abstract

This paper studies U.S. house prices across 45 metropolitan areas from 1980 to 2012. It applies a version of the Gordon dividend discount model for long‐run “fundamentals” and uses Mean Group and Pooled Mean Group estimation to estimate long‐run and short‐run determinants of house prices. We find great similarity across cities in that the long‐run house prices are largely explained by the same fundamentals; the long‐run rent to price ratio is approximately 5% plus 0.75 times the real interest rate (which is on the order of 2%). However, adjustments to deviations from the fundamentals are slow, in the long‐run, closing the gap at a rate of around 10% per year. We find sharp differences in short‐run adjustments (momentum) away from the fundamentals across cities, and the differences are correlated with local supply elasticities (more momentum with lower elasticity). Analysis of residuals suggests strong cyclical deviations, which are mean‐reverting.

Suggested Citation

Lai, Rose Neng and Van Order, Robert A., U.S. House Prices Over the Last 30 Years: Bubbles, Regime Shifts and Market (In)Efficiency (Summer 2017). Real Estate Economics, Vol. 45, Issue 2, pp. 259-300, 2017. Available at SSRN: https://ssrn.com/abstract=2954809 or http://dx.doi.org/10.1111/1540-6229.12127

Rose Neng Lai (Contact Author)

University of Macau ( email )

Av. Da Universidade, Taipa
Macau, Nil
Macau

Robert A. Van Order

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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