Is there a (new) bubble in the US housing market? An empirical specification to identify rational housing bubbles

Abstract

For the last two years (2020 and 2021), real home prices have risen enormously in the United States. Indeed, the peak prices of 2021 were even more prominent than those experienced during the last housing bubble, which burst in 2006. Thereby, one relevant question strongly arises: has it emerged a new housing bubble in the US economy? Based on previous academic rational bubble theoretical frameworks and the current account identity, this study demonstrates empirically that such a recent and extreme appreciation trend is not a consequence of a rational housing bubble. Through an OLS panel regression model it is applied an empirical test on three different periods of interest: the Dot-Com Bubble (1996-2000), the Housing Bubble (2002-2006), and the COVID-19 explored episode (2020-2021). From 2020 to 2021 and during the Dot-Com Bubble, an insignificant statistical influence of the US foreign capital inflows is detected on the real house price evolution. While at the same time, in the course of the Housing Bubble, such an effect of the international capital movements on the housing appreciation is statistically significant. Following the previous literature, this empirical evidence identifies the Housing Bubble as the only analysed period containing a rational bubble in the housing market. Consequently, as a result, the Dot-Com Bubble and the years under COVID-19 are not detected as rational housing bubble episodes. This categorization of the Dot-Com Bubble and the Housing Bubble is consistent with earlier academic research. Hence, the reported novel findings related to 2020 and 2021 are endowed with important credibility since the used empirical strategy can accurately classify prior documented rational bubble events. Moreover, these results exhibit a solid validity after applying several robustness tests. Thus, this analysis offers the first comprehensive empirical evidence postulating that a rational bubble did not emerge in the US housing market during the first two years of the COVID-19 pandemic.