Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions

42 Pages Posted: 23 Nov 2005 Last revised: 2 Dec 2005

See all articles by Charles P. Himmelberg

Charles P. Himmelberg

Goldman, Sachs & Co.

Christopher J. Mayer

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Todd M. Sinai

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

We construct measures of the annual cost of single-family housing for 46 metropolitan areas in the United States over the last 25 years and compare them with local rents and incomes as a way of judging the level of housing prices. Conventional metrics like the growth rate of house prices, the price-to-rent ratio, and the price-to-income ratio can be misleading because they fail to account both for the time series pattern of real long-term interest rates and predictable differences in the long-run growth rates of house prices across local markets. These factors are especially important in recent years because house prices are theoretically more sensitive to interest rates when rates are already low, and more sensitive still in those cities where the long-run rate of house price growth is high. During the 1980s, our measures show that houses looked most overvalued in many of the same cities that subsequently experienced the largest house price declines. We find that from the trough of 1995 to 2004, the cost of owning rose somewhat relative to the cost of renting, but not, in most cities, to levels that made houses look overvalued.

Suggested Citation

Himmelberg, Charles P. and Mayer, Christopher J. and Sinai, Todd M., Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions (September 2005). NBER Working Paper No. w11643. Available at SSRN: https://ssrn.com/abstract=812017

Charles P. Himmelberg

Goldman, Sachs & Co. ( email )

200 West St
New York, NY 10233
917-343-3218 (Phone)

Christopher J. Mayer (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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Todd M. Sinai

University of Pennsylvania - The Wharton School ( email )

1465 Steinberg Hall-Dietrich Hall
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Philadelphia, PA 19104-6302
United States
215-898-5390 (Phone)
215-573-2220 (Fax)

HOME PAGE: http://real.wharton.upenn.edu/~sinai

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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