The 2000s Housing Cycle With 2020 Hindsight: A Neo-Kindlebergerian View

Citation:

Chodorow-Reich, Gabriel, Adam Guren, and Timothy McQuade. Working Paper. “The 2000s Housing Cycle With 2020 Hindsight: A Neo-Kindlebergerian View”.

Abstract:

With ``2020 hindsight,'' the 2000s housing cycle is not a boom-bust but rather a boom-bust-rebound at both the national level and across cities. We argue this pattern reflects a larger role for fundamentally-rooted explanations than previously thought. We construct a city-level long-run fundamental using a spatial equilibrium regression framework in which house prices are determined by local income, amenities, and supply. The fundamental predicts not only 1997-2019 price and rent growth but also the amplitude of the boom-bust-rebound and foreclosures. This evidence motivates our neo-Kindlebergerian model, in which an improvement in fundamentals triggers a boom-bust-rebound. Agents learn about the fundamentals by observing ``dividends'' but become over-optimistic due to diagnostic expectations. A bust ensues when over-optimistic beliefs start to correct,  exacerbated by a price-foreclosure spiral that drives prices below their long-run level. The rebound follows as prices converge to a path commensurate with higher fundamental growth. The estimated model explains the boom-bust-rebound with a single fundamental shock and accounts quantitatively for cross-city patterns in the dynamics of prices, rents, and foreclosures.

Notes:

Revision requested at Review of Economic Studies
Last updated on 04/03/2022