NCPA - National Center for Policy Analysis


May 26, 2006

For some time now, there has been much speculation in the media that house prices are unsustainably high, that there is a "bubble" in the housing market, possibly even that house prices may already be on their way down in the East and West Coast regions of the United States. But according to researchers Charles Himmelberg, Christopher Mayer and Todd Sinai, there is little evidence of housing bubbles in almost any of the 46 single-family housing markets they studied, at least as of 2004.

In explaining how to assess the state of housing prices, the researchers point to four factors that are commonly overlooked in assessing housing prices:

  • The price of a house is not the same as the annual cost of owning.
  • High price growth is not evidence that housing is overvalued.
  • Considerable variability in the ratio of house prices to rents across housing markets can be the result of reasonable differences in expected gains in house prices and in taxes.
  • The sensitivity of house prices to changes in fundamentals is higher at times when real, long-term interest rates are already low and in cities where expected price growth is high.

For these reasons, conventional metrics for assessing prices in a housing market, generally fail to reflect accurately the state of housing costs. House price dynamics are a local phenomenon, say the researchers.

Source: David R. Francis, "Is There a Housing Bubble?" NBER Digest, April 2006; based upon Charles Himmelberg, Christopher Mayer, Todd Sinai, "Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions," National Bureau of Economic Research, Working Paper No. 11643, September 2005.

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