Bubbles and House Price Dispersion


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Author: Yang Tang, Ting Zeng, Shenghao Zhu

Abstracts: We investigate the rapid growth in the dispersion of housing prices across metropoli-tan statistical areas (MSAs) in the United States during 1975-2007. We rst examine several explanations for this pattern, and nd that it is dicult to fully explain it. Our econometric analyses show that the Log of price-to-rent ratios follows a random walk process. We then set up a parsimonious asset-pricing island model. We nd that the dispersion of fundamental housing prices grows too slow relative to that in data. Incor-porating rational bubble solutions, our calibrated model can match the rapid growth in the dispersion of housing prices.