Speculative Bubbles or Market Fundamentals? An Investigation of US Regional Housing Markets

This paper investigates the existence of speculative bubbles in the US national and in 23
regional housing markets over three decades (1978-2012). A new method for detecting
exuberance in housing markets is proposed. By taking changes in the macroeconomic
conditions (such as interest rate, per-capita income, employment, and population
growth) into consideration, the new method provides a better control for housing market
fundamentals and thereby it is expected to significantly reduce the chance of false
positive identification. Compared with the method of Phillips, Shi and Yu (2015a,b), the
new approach finds a dramatic reduction in the number of speculative housing markets
and shorter bubble episodes in the US. It locates only one bubble episode in the earlyto-
mid 2000s over the whole sample period in the national housing market. At the
regional level, it identifies three periods of speculation: late 1980s, early-to-mid 2000s,
and the post-crisis period in 2011-2012. The early-to-mid 2000s bubble episode is the
most severe one involving nine major metropolitan statistical areas.