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Manuscript
Abstract:
How were there large house price bubbles in cities with historically elastic
housing supply? High raw land prices capitalizing optimistic
beliefs about future housing demand curtailed supply in these cities. In cities with excess land
relative to the current population, optimistic land speculators are
the marginal buyers of real estate, making these cities more prone to housing
bubbles than fully developed cities. In the latter, the marginal buyers are
homeowners, who derive flow benefits from holding land in addition to
prospective capital gains and so need
not be especially optimistic. This theory matches the joint cross section of
house and land prices during the recent U.S. housing bubble. Home
builders, who were in the position to arbitrage high home prices by selling more
houses, acted like land speculators by taking large, unhedged positions many
years in advance of plans to build and sell. Less developed
neighborhoods within fully built cities also show larger boom-bust cycles.