Who Creates Housing Bubbles? An Agent-Based Study

This paper develops an agent-based spatial model of the housing market. A house is many families’ biggest asset. It is also widely held by financial institutions, in the form of mortgage-backed securities. As a result, avoiding extreme housing price volatility is crucial for maintaining financial stability of the nation. The housing market is very unique: it is less liquid, highly regulated, highly leveraged, involves speculative behaviors, and exhibits spatial correlations. To this day, there are few housing market models that take into account all of these complications. In this paper, we propose an agent-based spatial model of the U.S. housing market. Preliminary results show that sensible aggregate outcomes that are generated from individual interaction, and a lenient lending criteria might be responsible for causing a housing bubble.