How Big was the Housing Price Cycle?

Various housing “price” indices agree than the 2000s had a large housing cycle, with real housing values rising over a prolonged period, and then falling back close to their initial values in just a year or two. But they do not agree on the magnitude of the price boom, as shown in Table 1. The Table’s ten measures differ in terms of whether they compare same properties over time (Case-Shiller, Radar Logic, and OFHEO), or hedonically adjust new housing prices for measured characteristics (Census Bureau). Table 1 reveals how much of the difference among the same-property indices is related to their aggregation of the various cities or MSAs sampled, because the range of medians is only 10 percentage points, as compared to 38 percentage points for the national composites.

The Case-Shiller and Radar-Logic are commercially sponsored indices: it is possible that the MSAs sampled are not random with respect to the elasticity of housing supply (the sampled MSAs have less elastic supply than the un-sampled). Consistent with this hypothesis, the Case-Shiller composite-10 (the 10 MSAs they have followed longer) appreciates more than the Case-Shiller composite 20. For more research on reconciling various housing price indices, see some of these posts and the references cited therein:

C-S/OFHEO comparison from Professor Nunes

A New Comparative Analysis of Housing Price Indices

Case-Shiller OFHEO faceoff

Regional shifts may cause housing prices to rise in some places and fall in others, so I take 40-50% as the size of the housing property value boom to be explained by national factors such as exuberance, monetary policy, or technical change. Moreover, “housing property values” are not the same as “housing prices” because the former also reflects changes in the quantity of housing on a given property and changes in land prices. Conceptually, the Census Bureau’s quality-adjusted index of new home prices could well be the best indicator of housing prices, and it shows a 20 percent housing price peak.

I think it’s safe to say that, from a national perspective, the housing price cycle involve peak housing price appreciation of 20-40 percent.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

1 Comment on How Big was the Housing Price Cycle?

  1. The census looks at new homes, which is a very small share of all homes–particularly now. Their locations are also fundamentally different from existing homes.

    As to value vs price, almost all of changes in price arise because of changes in land values (improvements generally depreciate in real terms), so I am not sure I understand the point of the distinction. All of the indexes do attempt to control for dwelling quality.

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