Inefficiencies in the real estate market: Implications for price dynamics

The economic literature suggests that special institutional characteristics of the real estate market produce inefficiencies that contribute to price volatility. Varying hypotheses have been set forth in the literature to explain possible sources of inefficiency in regional real estate markets. These include: (i) speculative behavior, (ii) supply side restrictions (land and regulatory), (iii) the time required to build new structures, and, (iv) the large transactions costs which characterize the housing market. However, no study has attempted to test the relative contribution of the competing hypotheses to inefficiency in regional real estate markets, and their implications for price dynamics. The purpose of this dissertation is, therefore, to : (1) identify volatility in housing prices by testing for market inefficiency; (2) identify and quantify those characteristics of local real estate markets which contribute to price volatility ; (3) test a simple model for the US housing market which incorporates local market characteristics and speculative behavior.; The results of the dissertation shows that prices in U.S. real estate markets are indeed volatile, and that local market characteristics contribute to this volatility. The model for the US housing market shows that in addition to fundamentals, factors such as space restrictions, transactions costs and construction cycles have an effect on price dynamics. Furthermore, the model suggests that price bubbles may be present in a number of US cities from the mid-1980s through 2000.