Assessing High House Prices

Bubbles, Fundamentals and Misperceptions

Bibliographic Data

ID4029569
AuthorsCharles Himmelberg (Senior Economist, Federal Reserve Bank of New York, New York, New York.), Charles P Himmelberg (Federal Reserve Bank of New York), Christopher Mayer (0000-0002-5612-5481, Paul Milstein Professor, Finance and Economics, Columbia Business School, Columbia University, New York, New York; Research Associate, and is a Sinai Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts.), Todd Sinai (Associate Professor of Real Estate, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania.)
Year2005
Volume19
Issue4
Pages67-92
Publication date2005-11-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Journal of Economic Perspectives (JOURNAL)
Journal identifiersISSN: 0895-3309 • E-ISSN: 1944-7965
PublisherAmerican Economic Association (PUBLISHER • US)
DOI10.1257/089533005775196769
OpenAlexW3122156058
LanguageEN
Citations received89
References cited31

How does one tell when rapid growth in house prices is caused by fundamental factors of supply and demand and when it is an unsustainable bubble? In this paper, we explain how to assess the state of house prices-both whether there is a bubble and what underlying factors support housing demand-in a way that is grounded in economic theory. In doing so, we correct four common fallacies about the costliness of the housing market. For a number of reasons, conventional metrics for assessing pricing in the housing market such as price-to-rent ratios or price-to-income ratios generally fail to reflect accurately the state of housing costs. To the eyes of analysts employing such measures, housing markets can appear "exuberant" even when houses are in fact reasonably priced. We construct a measure for evaluating the cost of home owning that is standard for economists-the imputed annual rental cost of owning a home, a variant of the user cost of housing-and apply it to 25 years of history across a wide variety of housing markets. This calculation enables us to estimate the time pattern of housing costs within a market. As of the end of 2004, our analysis reveals little evidence of a housing bubble

Econometrics · Economics · House price · Microeconomics · Renting · Supply and demand · Economic theories and models · Financial Literacy, Pension, Retirement Analysis · Housing Market and Economics

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