Bubble, Bubble, Toil and Trouble
Last Updated: 02/01/07
Home prices have been in the news a lot lately. In particular, some observers fear that the swift increase in prices during the early part of the new century may have constituted a housing price bubble. This concern has been prompted primarily by the rapidity of the rise, both compared with previous years and relative to growth in rents. The home price increases, however, occurred during a period of rising incomes and falling mortgage rates. The changes in both income and mortgage rates made housing more affordable and should therefore have led to higher home prices, all else being equal. In this article, they document changes in prices for the country as a whole and for many major markets. They examine whether changes in the economy, including income and mortgage rates, are enough to explain home price changes, both nationally and locally.