A COINTEGRATION TEST TO VERIFY THE HOUSING BUBBLE

Abstract

Housing prices in the US rose rapidly from 2000-2007Q3. Based on this evidence, the financial and general press concluded the US experienced a housing bubble. The efficient market theory denies the possibility of a bubble. This paper applies the statistical technique of cointegration to substantiate the presence of a housing bubble. The paper finds the statistical evidence consistent with the presence of a housing bubble in the period 2000-2007Q3 and not the underlying economic conditions.