Abstract
In this article, we demonstrate that a quantal response statistical equilibrium approach to the US housing market with the help of the maximum entropy method of modeling is a powerful way of revealing different characteristics of the housing market behavior before, during and after the recent housing market crash in the US. In this line, a maximum entropy approach to quantal response statistical equilibrium model (QRSE) is employed in order to model housing market dynamics in different phases of the most recent housing market cycle using the S&P Case Shiller housing price index for 20 largest- Metropolitan Regions, and Freddie Mac housing price index (FMHPI) for 367 Metropolitan Cities for the US between 2000 and 2015. Estimated model parameters provide an alternative way to understand and explain the behaviors of economic agents, and market dynamics by questioning the traditional economic theory, which takes assumption for the behavior of rational utility maximizing representative agent with self-fulfilled expectations as given.
Highlights
The US housing market experienced one of its key periods of boom-bust cycle between 2000 and2015, urging researchers to understand and explain the movements of house price changes throughout the cycle
In contrast with the traditional theory, this study shows that individuals expectations about fundamental rate of price increases never coincided with the actual average price change of the market (μ 6= ξ)
It has been shown that employing the maximum entropy method with plausible theoretical frameworks as the constraints, we are able to overcome the incomplete information problem resulted from unavailability of data for individuals’ actions
Summary
The US housing market experienced one of its key periods of boom-bust cycle between 2000 and. 2015, urging researchers to understand and explain the movements of house price changes throughout the cycle. To capture the behavior of the US housing market for several sub-periods of before, during and after the market collapse, Figure 2 represents the log density distributions of monthly house price growth rates for all available metropolitan areas represented in two different monthly house price indices, Case-Shiller Housing Price Index and Freddie Mac Housing Price Index (FMHPI). Some distortions in the distribution appear to arise at the end of the boom (2000–2006) and during the crash (2007–2009) by pointing out a change in the characteristics of the market behavior
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