Sunspots and self-fulfilling beliefs in the US housing market

This paper provides a rational expectations equilibrium framework to organize the following observations about the U.S. housing market from 1975 to 2007: (i) housing occupancy patterns were approximately constant, (ii) rents were stable, and (iii) house prices appreciated considerably in the late 1990s. I develop a model based on search and matching theory and close it by specifying a state of household confidence that is assumed to take one of two sunspot-driven values: normal or exuberant. The model generates a substantial increase in house prices and stable rents as the probability of the exuberant state increases, driven by self-fulfilling beliefs. I explore which aspects of the parameterization are important for generating a large appreciation in house prices in the model. (C) 2014 Elsevier Inc. All rights reserved.