U.S. House Prices Over the Last 30 Years: Bubbles, Regime Shifts and Market (In)Efficiency

This paper studies the evolution of U.S. house prices across 45 metropolitan areas from 1980-2012. It uses a version of the Gordon dividend discount model, modelling price as present value of imputed rents as a measure of "fundamentals." This allows for a parsimonious specification, using only lagged rents, property values and interest rates (real and nominal) to explain property values. We find that cities share long run fundamentals, but adjust to them slowly at a rate of around 10% per year, which is relatively constant across cities. However we also find sharp differences in short run adjustments across cities, which are correlated with local supply elasticities. Analysis of residuals suggests strong cyclical deviations from fundamentals throughout the period, with a high degree of serial correlation. The bubble period (2000-2007) was longer than usual and appears to have been extended after 2002, when it was dying out, in a way that is coincident with the rise in subprime securitization.