U.S. House Prices : The Role of Fundamentals

This paper uses a competitive-equilibrium housing-market model to evaluate the role that interest rates played in the U.S. housing boom and bust. The model features stochastic construction costs, disposable income, interest rates, and population, and endogenously determines the supply of developed land and house prices. It is calibrated separately to 95 cities and data on the four state variables alone are used to calculate house prices implied by fundamentals for each city. Actual prices during 1995-2010 closely match the predicted prices implied by observed changes in the four state variables and reasonably small perceived changes in the long-run average levels of interest rates and demand growth rates