Price Expectations and the U.S. Housing Boom

36 Pages Posted: 14 Sep 2015

See all articles by Pascal Towbin

Pascal Towbin

Swiss National Bank

Sebastian Weber

International Monetary Fund (IMF)

Date Written: July 2015


Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices. As it has proven to be difficult to explain the large price increase by observable fundamentals, many observers have emphasized the role of speculation, i.e. expectations about future price developments. The argument is, however, often indirect: speculation is treated as a deviation from a benchmark. The present paper aims to identify house price expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use sign restrictions to identify house price expectation, housing supply, housing demand, and mortgage rate shocks. House price expectation shocks are the most important driver of the boom and account for about 30 percent of the real house price increase. We also construct a model-based measure of exogenous changes in price expectations and show that this measure leads a survey-based measure of changes in house price expectations. Our main identification scheme leaves open whether expectation shifts are realistic or unrealistic. In extensions, we provide evidence that price expectation shifts during the boom were primarily unrealistic and were only marginally affected by realistic expectations about future fundamentals.

Keywords: Housing Market, House Price Expectations, Speculation, Housing Boom, VAR

JEL Classification: E30, E40, R30

Suggested Citation

Towbin, Pascal and Weber, Sebastian, Price Expectations and the U.S. Housing Boom (July 2015). IMF Working Paper No. 15/182, Available at SSRN:

Pascal Towbin (Contact Author)

Swiss National Bank ( email )

Fraumuensterstr. 8
Zuerich, 8022

Sebastian Weber

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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