Understanding booms and busts in housing markets

Research output: Contribution to journalArticlepeer-review

104 Scopus citations

Abstract

Some booms in housing prices are followed by busts. Others are not. It is generally difficult to find observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of “social dynamics.” Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.

Original languageEnglish (US)
Pages (from-to)1088-1147
Number of pages60
JournalJournal of Political Economy
Volume124
Issue number4
DOIs
StatePublished - Aug 2016

ASJC Scopus subject areas

  • Economics and Econometrics

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