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American Economic Review: Vol. 103 No. 3 (May 2013)

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A Nation of Gamblers: Real Estate Speculation and American History

Article Citation

Glaeser, Edward L. 2013. "A Nation of Gamblers: Real Estate Speculation and American History." American Economic Review, 103(3): 1-42.

DOI: 10.1257/aer.103.3.1

Abstract

The great housing convulsion that buffeted America between 2000 and 2010 has historical precedents, from the frontier land boom of the 1790s to the skyscraper craze of the 1920s. But this time was different. There was far less real uncertainty about fundamental economic and geographic trends, making the convulsion even more puzzling. During historic and recent booms, sensible models could justify high prices on the basis of seemingly reasonable projections about stable or growing prices. The recurring error appears to be a failure to anticipate the impact that elastic supply will eventually have on prices, whether for cotton in Alabama in 1820 or land in Las Vegas in 2006. Buyers don't appear to be irrational but rather cognitively limited investors who work with simple heuristic models, instead of a comprehensive general equilibrium framework. Low interest rates rarely seem to drive price growth; underpriced default options are a more common contributor to high prices. The primary cost of booms has not typically been overbuilding, but rather the financial chaos that accompanies housing downturns.

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Authors

Glaeser, Edward L. (Harvard U)

JEL Classifications

R12: Size and Spatial Distributions of Regional Economic Activity
R31: Housing Supply and Markets


American Economic Review


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