What Was Behind the Boom and Bust in House Prices?

The causes behind the boom and bust of house prices over the past decade or so are generally boiled down to three possible culprits:

• Fundamental shocks, such as changes in the ability to build houses or in people’s desire to own houses
• Credit market changes, such as looser lending restrictions allowing more people to purchase houses
• Beliefs, or house prices increasing simply because people thought they would increase

Recent research points more strongly to one in particular: that people’s beliefs about house prices had changed.

Greg Kaplan, an economics professor at the University of Chicago, discussed this finding in his paper “Consumption and House Prices in the Great Recession: Model Meets Evidence,” presented at the St. Louis Advances in Research (STLAR) Conference on April 7-8. In the video above, he discussed his work in an interview with St. Louis Fed Vice President and Economist David Andolfatto.

• Connecting Policy with Frontier Research: Consumption and House Prices in the Great Recession: Model Meets Evidence
• On the Economy: Aging Populations May Mean Lower Economic Growth
• On the Economy: What Were Some of the Lasting Effects Caused by the Recent Housing Crisis?