The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Between 1996 and 2006 the U.S. has experienced an unprecedented boom in house prices.
As it has proven to be difficult to explain the large price increase by observable
fundamentals, many observers have emphasized the role of speculation, i.e. expectations
about future price developments. The argument is, however, often indirect: speculation is
treated as a deviation from a benchmark. The present paper aims to identify house price
expectation shocks directly. To that purpose, we estimate a VAR model for the U.S. and use
sign restrictions to identify house price expectation, housing supply, housing demand, and
mortgage rate shocks. House price expectation shocks are the most important driver of the
boom and account for about 30 percent of the real house price increase. We also construct a
model-based measure of exogenous changes in price expectations and show that this measure
leads a survey-based measure of changes in house price expectations. Our main
identification scheme leaves open whether expectation shifts are realistic or unrealistic. In
extensions, we provide evidence that price expectation shifts during the boom were primarily
unrealistic and were only marginally affected by realistic expectations about future