HKS Affiliated Authors
Fred and Eleanor Glimp Professor of Economics, FAS
Excerpt
Excerpt
An Extrapolative Model of House Price Dynamics. Edward Glaeser, March 2015, Paper. "A modest approximation by homebuyers leads house prices to display three features that are present in the data but usually missing from perfectly rational models: momentum at one-year horizons, mean reversion at five-year horizons, and excess longer-term volatility relative to fundamentals. Valuing a house involves forecasting the current and future demand to live in the surrounding area. Buyers forecast using past transaction prices. Approximating buyers do not adjust for the expectations of past buyers, and instead assume that past prices reflect only contemporaneous demand, as with a capitalization rate formula..." Link