US House Price Bubbles and Busts

Abstract

We use data for a large panel of US Metropolitan Statistical Areas (US MSAs) in order to assess the ex ante likelihood of house price bubbles. We employ a vector error correction–based model in order to project house prices under different scenarios. Projected house price (and employment) distributions are generated for each MSA. The model’s predictions are compared to actual outcomes—focusing primarily on the house price bubble and bust of the Great Recession. In applying these results to local governments, we document a substantial rise in property tax rates during the recent crisis. Results from this exercise suggest that interactions between the property tax and house price fluctuations may have exacerbated the bubble and bust. More generally, our analysis underscores the complexity of forecasting bubbles and cautions against attempting to do so using the notion of a national housing market. Even in recent years, housing markets are heavily influenced by local supply and demand conditions.