Modelling the US housing bubble.pdfVIP

Research in Business and Economics Journal Modeling the U.S. housing bubble: an econometric analysis Jonathan Kohn Shippensburg University of Pennsylvania Sarah K. Bryant Shippensburg University of Pennsylvania Abstract The US economy experienced excessive demand for housing for over a decade, causing a housing boom. Consumers went on a spending spree driven by higher and higher, real and perceived home equity values, as well as equity market increases. In the US market, “bigger is better” or “as much as one can afford” became the mentality of home buyers. In addition, consumers were driven to buy houses now to avoid future higher prices. Interest rates were generally held to historic lows from 1990 to about 2007. For a long time, the Federal Reserve was praised for helping the financial markets sustain their roles in the housing markets. Since the housing market crash, beginning about 2006, the Federal Reserve has been blamed for the housing crisis. This research will examine the housing market boom to determine what factors led to this economic situation. Keywords: housing bubble, housing crash, housing boom, greed, modeling housing prices Modeling the U.S. housing bubble, Page 1 Research in Business and Economics Journal INTRODUCTION Over the past six decades, housing markets in the United States have periodically gone through boom and bust cycles. Following World War II, housing boomed to accommodate returning troops and their “baby boom” families. In the 1960s and 1970s, the baby boomers entered their household formation years, which caused the housing markets to expand rapidly. Inflationary effects of the late