Research Archive

Bubble Trouble? Not Likely

Christopher Mayer, Todd Sinai

Publication type: Magazine article

Research Archive Topic: Real Estate


For the the past several years, Chicken Littles have squawked that the sky is about to fall on the housing market. And it's tempting to believe them. The market sure feels like a bubble: The rampant growth of house prices over the past decade, the rising price of houses relative to rent and the astonishing gap in many cities between price and income are almost unprecedented in recent history. The last time things felt this way, in the late 1980s, real house prices subsequently dropped by one-third in cities like Boston and Los Angeles. Yet basic economic logic suggests that this apparent evidence of a bubble is anything but. Even in the highest-price cities, housing is, at most, slightly more expensive than average. Here's why: While house prices over the last decade have gone through the roof, the annual cost of owning a house has not.
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Mayer, Christopher, and Todd Sinai. "Bubble Trouble? Not Likely." Hermes, Fall 2005.

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