Housing and Other Price Bubbles: The Buildup, the Burst, and the Impact

Abstract

This chapter argues that asset price bubbles need to be re-examined carefully because their adverse impact on an economy has often been very substantial. The bursting of the housing bubble in 2006 and its consequences on triggering the near global financial crisis is such example. After reviewing the general literature on asset bubbles on housing and stock markets bubbles and their impacts on an economy, we contribute to the literature by proposing a fundamental housing price model that allows us to estimate the magnitude of residential housing bubbles and their starting and ending dates. The duration and the magnitude of the U.S. housing bubble in the early 2000s are estimated under alternative assumptions about the nature of forces affecting the demand for housing and housing prices.