Working Paper

Understanding booms and busts in housing markets


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 consistent with these observations. Real estate agents have heterogeneous expectations about long-run fundamentals but change their views because of \\"social dynamics.\\" Agents meet randomly with one another. Those with tighter priors are more likely to convert others 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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Authors

    Rebelo, Sergio

    Eichenbaum, Martin

    Burnside, Craig

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta CQER Working Paper

Publication Date: 2012

Number: 2012-02