June 01, 2007

Why Do House Prices Fall? Perspectives on the Historical Drivers of Large Nominal House Price Declines

Daniel McCue, Eric S. Belsky

W07-3: Despite many efforts to model house prices in the United States, reliably predicting when, and by how much, house prices will fall remains an elusive goal. Most efforts at modeling house prices have focused on explaining long-run equilibrium prices. The weight of evidence supports the view that in the long run, house prices are determined by employment growth and population growth, as well as levels and growth in real incomes, real construction costs, and real interest rates (Rosen 1974; Ozanne and Thibodeau 1983; Poterba 1991; Abraham and Hendershott 1992; Dipasquale and Wheaton 1990; Malpezzi et.al 1998; Case and Shiller 2003; Cutts and Nothaft 2005). Other models focus on explaining deviations in house prices around a long-run equilibrium. Many studies have found that prices often overshoot equilibrium prices only to revert back to mean long-run predicted values as a result of the size of the differences between actual and predicted house values and cyclical economic factors (Malpezzi 1996; Malpezzi 1998; Abraham and Hendershott 1996; Capozza, Hendershott, Mack and Mayer 2002; Zandi, Chen and Carey 2006; Case and Shiller 1989; Capozza and Seguin 1996). Still other studies model house price change, not in terms of deviations from predicted long-run values, but the variables that influence year to year changes in metropolitan house prices, such as current and past changes in population, unemployment, income, wealth or debt (Jud and Winkler 2002; Lamont and Stein 1999)…

Category: Working Papers

Read More About: Housing Markets & Conditions