Bubbles, Post-Crash Dynamics, and the Housing Market
Liu, Crocker H.; Nowak, Adam; Rosenthal, Stuart
This paper documents and explains previously unrecognized post-crash dynamics following the collapse of a housing market bubble. Although home prices in Phoenix doubled 2004-2006, the relative price of small-to-large homes remained strikingly constant. That changed following the crash when small-home relative prices fell up to 80 percent. We argue that post-crash exit of speculative developers allowed relative prices to diverge while differences in demand elasticities and turnover associated with job loss pushed small-home values down relative to large homes. As speculative developers return relative prices should revert back to pre-boom levels, consistent with mean reversion that began in 2011. The implied post-crash mispricing of homes can be mitigated if cities publish size-stratified home price indexes.
Cornell; housing market; home price indexes; bubbles
Required Publisher Statement: © Cornell University. This report may not be reproduced or distributed without the express permission of the publisher.