House Price Dynamics: A Survey of Theoretical and Empirical Issues

Abstract

During the past decade, the number of studies on intertemporal changes in house prices hasincreased rapidly because of wider availability of extensive micro-level data sets, improvementsin modeling techniques, and expanded business applications. This article reviews the maintheoretical, empirical, and methodological issues related to analyzing house price dynamics.The theoretical issue that has received the most attention is informational efficiency. Theliterature in this regard generally supports our intuition that real estate markets are notefficient—that is, short-run intertemporal changes in house prices and excess returns are foundto be positively serially correlated. No trading rule has emerged that consistently yields above-normal returns, however, because of the substantial transaction costs. The second part of thearticle surveys various methodological issues in estimating house price indices and excess returns.Given severe measurement problems and biases in models, the literature increasingly indicatesthat any result might be an artifact of the price index used rather than a real feature of the market.More research is needed before firm conclusions can be reached about inefficiency in theresidential real estate market.