An Extrapolative Model of House Price Dynamics / Edward L. Glaeser, Charles G. Nathanson.

Format:

Book

Author/Creator:

Glaeser, Edward L.

Contributor:

National Bureau of Economic Research.

Nathanson, Charles G.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21037.

NBER working paper series no. w21037

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

A modest approximation by homebuyers leads house prices to display three features that are present in the data but usually missing from perfectly rational models: momentum at one-year horizons, mean reversion at five-year horizons, and excess longer-term volatility relative to fundamentals. Valuing a house involves forecasting the current and future demand to live in the surrounding area. Buyers forecast using past transaction prices. Approximating buyers do not adjust for the expectations of past buyers, and instead assume that past prices reflect only contemporaneous demand, as with a capitalization rate formula. Consistent with survey evidence, this approximation leads buyers to expect increases in the market value of their homes after recent house price increases, to fail to anticipate the price busts that follow booms, and to be overconfident in their assessments of the housing market.

Notes:

Print version record

March 2015.