Momentum and House Price Growth In the U.S.: Anatomy Of a "Bubble"

Abstract

This paper analyzes the bubble in property values in the U.S. in the period from 1999 through 2005. We define a bubble as a regime shift characterized by a change in the properties of house price deviations from underlying “fundamentals” that become more self-sustaining and/or more volatile than in other periods. We model the fundamentals of house price growth as lagged adjustments of prices to the expected present value of future service flows (imputed rent) from owner-occupied properties. We then study the autoregressive behavior of the errors generated from the estimated fundamentals equations with panel data from 44 Metropolitan Statistical Areas for the period of 1980-2005. We find evidence of momentum in house price growth throughout the period, but momentum increased after 1999. Breaking down the period further, we find that the bubble happened mostly after 2003; it was for a relatively short period and was characterized by a series of positive, seemingly random, shocks. Before that, price changes were reasonably well explained by the “fundamentals,” such as a decline in long term real rates in the early part of the 1999-2005 period.