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Working Papers

Booms and Busts in Real Estate

Working paper #702
Susan M. Wachter and Anthony W. Orlando

Real estate booms and busts have been a recurring feature of the global economy for decades, including in the 20th century, the Great Depression, the thrift crisis of the 1970s and 1980s, the East Asian Crisis of the late 1990s, and the recent crisis. Real estate is particularly prone to pro-cyclical behavior due to the temporal lag in construction and the difficulty in short selling the underlying asset and the lack of effective derivatives to trade bubbles. In the most recent cycle, real estate investment trusts may have helped prevent overbuilding, but the complexity, heterogeneity, and opacity of mortgage securitization products encouraged the market to underprice risk, resulting in a credit bubble. While regulatory efforts and market memory may contain oscillations for some time, we have not seen the end of booms and busts in real estate markets.

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