THE PERSISTENCE OF REAL-ESTATE CYCLES

This paper presents a model that attempts to explain the underlying ca uses of the prolonged cycles observed in real estate markets. In addit ion, the paper characterizes the features that make some properly type s more prone to such boom-and-bust behavior. The combination of demand uncertainty, adjustment costs, and construction lags leads to two phe nomena that may help explain market persistence. The first phenomenon is the reluctance of owners to adjust occupancy levels, even in the fa ce of large shifts in renter demand. The second phenomenon is the occu rrence of periods of sustained overbuilding: the addition of new suppl y in the face of already high vacancy rates.