Real Estate Cycles: Theory and Empirical Evidence

Abstract

Real estate markets perform cyclically. The cycles affect both the output and the absorption of units, and they influence the prices and rents of both existing properties and new construction. Expectations for rent increases and the time to start and continue construction are central to the structure of real estate cycles. When participants underforecast rent increases, serially correlated unexpected excess returns trigger construction even if contractors distinguish between relative and nominal price changes. Prices in real estate markets depend on the behavior of the cycle, which in turn affects production and prices. The findings for multifamily housing in Phoenix and Tucson, for example, suggest that cycles are characterized by upside and downside lengths of three years.

JEL Classification: E32