Prices, Expectations and the Changing Housing Market: A Commentary and Discussion

PWP-CCPR-2010-025

Abstract

The last decade of housing price fluctuation, crises of housing affordability and the turmoil of housing foreclosures brought housing, and housing markets, closer to center stage in the debates over the future of the global economy. As part of the renewed interest in housing some recent papers have questioned whether we have an adequate model for understanding housing prices and housing market behavior more broadly. Specifically, is the expected utility model of housing market behavior, and the associated hedonic housing price model, still relevant in an increasingly uncertain housing market? Certainly the recent rapid escalation in housing prices and the behavior of agents in the housing market has further stimulated rethinking of our models of housing markets. Analysts are asking what is the future behavior of and in housing markets, and how will the housing market function in the post housing market bubble decade. It is a useful time to take another look at how the housing market behaves and what underpins housing prices. Even to ask the question, do we need a new model of housing market behavior?