One Man’s Bubble Is Another Man’s Rational Behavior: Comparing Alternative Macroeconomic Hypotheses for the US Housing Market

Competing macroeconomic hypotheses have been developed to explain the US housing market and possible bubble behavior. We employ both seasonally adjusted (SA) and non-seasonally adjusted (NSA) monthly data for about 30 independent variables to examine alternative macro hypotheses for home prices. Using a neural network model as an atheoretical non-linear approach to capture the relative importance of alternative macro variables, we show that these hypotheses generate different macro relevance. As an alternative to testing housing time series, we focus on bubble identification being hypothesis dependent. Model forecast errors (residuals) identify the potential presence of bubbles through standardized residual CUSUM tests for structural breaks. By testing for housing bubbles from these unstructured models, we generate conclusions on the presence of bubbles prior to the Great Financial Crisis and the post-pandemic periods. Competing macro hypotheses or narratives will generate different conclusions on the presence of bubbles and create bubble identification issues.