Understanding Booms and Busts in Housing Markets
Some booms in housing prices are followed by busts. Others are not. It is generally di¢ cult to Önd observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of ìsocial dynamics.îAgents with tighter priors are more likely to con- vert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.
Burnside, Craig, Martin Eichenbaum and Sergio Rebelo. 2016. Understanding Booms and Busts in Housing Markets. Journal of Political Economy. 124(4): 1088-1147.