From Ed Glaeser, Joseph Gyourko, Eduardo Morales and Charles Nathanson:
The volatility of housing prices and construction levels is high. Both price changes and permits exhibit strong positive serial correlations at one year frequencies. Prices, but not permits, show strong mean reversion over five year periods. Can these facts be reconciled with a dynamic housing model, where in the tradition of Rosen and Roback, prices reflect the value of access to an area’s income and amenities? We calibrate a dynamic spatial equilibrium model and find that it can fit some, but far from all, of the key empirical features of America’s housing markets. Long-run mean reversion is compatible with the model, but short-term positive price change persistence is not. Highly volatile prices and construction are compatible with the model if local wage levels follow close to a random walk, but not if there is more mean reversion in wages. Using HMDA income data allows our model to match most observed housing market volatility, but using BEA income data does not.
