Housing market dynamics : any news?

Abstract

This paper quantifes the importance of news shocks for housing market fluctuations. To this purpose, we extend Iacoviello and Neri (2010) s model of the housing market to include news shocks and estimate it using Bayesian methods and U.S. data. We find that news shocks: (1) account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and (2) significantly contributed to booms and busts episodes in house prices over the last three decades. By linking news shocks to agents expectations, we find that house price growth was positively related to inflation expectations during the boom of the late 1970 s while it was negatively related to interest rate expectations during the housing boom that peaked in the mid-2000s.