Is There a Bubble in the Housing Market?

Housing prices began rising rapidly in Boston in 1984. In 1985 alone, home prices in the Boston metropolitan area went up 39 percent. In a 1986 paper, Case constructed repeat-sales indexes to measure the extent of the boom in constant-quality home prices. The same paper reported that a structural supply-and-demand model, which explained home price movements over ten years and across ten cities, failed to explain what was going on in Boston. The model predicted that income growth, employment growth, interest rates, construction costs, and other fundamentals should have pushed Boston housing prices up by about 15 percent. Instead, they went up over 140 percent before topping out in 1988. The paper ended with the conjecture that the boom was at least in part a bubble.