Chasing Trends in the U.S. Housing Market
46 Pages Posted: 20 Jan 2010 Last revised: 2 Mar 2011
Date Written: February 2011
In this paper we develop and estimate a behavioral model with boundedly rational investors for the U.S. housing market. There are two groups of investors, fundamentalists and chartists. Fundamentalists expect the house price to revert to its fundamental value based on rents, while chartists extrapolate past price trends. Investors are allowed to switch between groups conditional on recent performance. The estimation results show that fundamentalists and chartists are usually present in the market with roughly equal proportions. From 1992 until 2005, however, the proportion of chartists in the market was substantially above the long-term average, such that the house price level climbed far above its fundamental value. In an out-of-sample assessment the model outperforms competing time-series models and predicts the decline of the housing market from 2006 onwards. Finally, the estimated model generates boom-bust price cycles endogenously.
Keywords: Housing market, behavioral finance, heterogeneous agents, bubbles
JEL Classification: G17, R31, G12
Suggested Citation: Suggested Citation