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Understanding Recent Trends in House Prices and Home Ownership

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Understanding Recent Trends in House Prices and Home Ownership

In this paper, Robert J. Shiller charts out the recent boom in real home prices across different cities of U.S. The construction costs of lumber, plywood, gypsum wallboard witnessed a significant rise according to the statistical data, thus leading to increased home prices. The author also surmises that home sellers wait for high prices when the prices are falling. The boom in the house prices occurred due to the common viewpoint that houses are a good investment.  

Feedback and Speculative Bubbles
Speculative bubble is nothing but the reaction of public towards price increases and expectation of potential increase in the prices. The reaction of the public results from certain notions, which lead to emotional speculative interest in the markets and an increase in the prices. However, when the prices stop increasing, the public interest in investment declines and finally, the bubble bursts. Usually, news media and rumors are contagious, thereby making people excited about going for risky investments. The author deduces that expectations of home price increases are created due to fascination of national media with the real estate boom. In addition, urban cities attract people through its public transport and high-rise buildings. Whereas, superstar cities have expensive homes as compared to the average home across other cities. 

Home Ownership and Consumption of Housing
Buying home is an investment and consumption decision. The author construes that the housing boom encouraged potential homeowners and lenders. The government backed homeownership over a long period. Renting encourages diversification of investments, whereas homeownership is a highly leveraged, undiversified investment. Moreover, investing in housing can lead to speculation and excessive volatility in the market for homes.   

Residential Investment
Residential investment denotes the economic activity connected with housing structures. It is volatile constituent of GDP in the U.S. and is related to the business cycle. The author infers that the relation between housing investment and the business cycle may be changing.

Broad Historical Comparisons
The author compares the home prices of Netherlands, Norway and U.S. and observes that enormous boom in the house prices have occurred in all the three countries since the 1990s.

Case Studies of Booms
The author tracks three case studies to explain the real estate boom and its psychology. The 1950 home construction boom took place due to competition between lenders and government, the shift of consumers towards suburban living and war fears. The 1970s U.S. farmland boom occurred owing to the rising food prices, changes in tax laws and investment funds specializing in investing in farmlands. The sudden reversal in the London homes prices in 2005 happened because the Bank of England raised rates leading to the revival of the boom.

Conclusion
The author concludes that emotions such as fears of war, terrorism, environmental destruction; institutional changes; monetary policy; varying opinions of people and their expectations of future home price increases piloted the boom of house prices.   

Shiller, Robert J., "Understanding Recent Trends in House Prices and Home Ownership" (September 14, 2007). Cowles Foundation Discussion Paper No. 1630 Available at SSRN: http://ssrn.com/abstract=1017546

 

 

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