Discussion Paper Details

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Title: Understanding Booms and Busts in Housing Markets

Author(s): Craig Burnside, Martin Eichenbaum and Sérgio Rebelo

Publication Date: February 2011

Keyword(s): housing prices and real estate

Programme Area(s): International Macroeconomics

Abstract: Some booms in housing prices are followed by busts. Others are not. In either case it is difficult to find observable fundamentals that are correlated with price movements. We develop a model that is consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics". Agents meet randomly and those with tighter priors are more likely to convert other agents to their beliefs. The model generates a "fad": the fraction of the population with a particular view rises and then falls. Depending on which agent is correct about fundamentals, these fads generate boom-busts or protracted booms.

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Bibliographic Reference

Burnside, C, Eichenbaum, M and Rebelo, S. 2011. 'Understanding Booms and Busts in Housing Markets'. London, Centre for Economic Policy Research.