Real estate bubbles and monetary policy - the US case

This paper attempts to provide an answer to the question whether the recent surge in US real estate prices is fundamentally driven, or whether the current situation reflects bubble symptoms. This is a question of paramount importance since in the case of a bubble in real estate prices the question emerges if and how the Fed should react to it. Implicitly, also monetary policy in the euro area in these days is addressed as well with France and Spain experiencing exorbitant price increases of real estate during at least the last four years and the ECB trying to play down the dangers of this development for price stability. Our aim is to divide the valuation of the US housing market into a "bubble component and into a fundamentally justified component. For this purpose, the US real estate market and its peculiarities are described and empirical indications of a bubble are identified We. contrast the empirical results with the ongoing question whether asset prices and asset price bubbles are and should be a matter of attention to central bank authorities in the process of monetary policy making.