When speculators meet constructors: positive versus negative feedback in experimental housing markets

Asset markets are characterized by positive feedback through speculative demand. But housing markets distinguish themselves from other asset markets in that the supply of housing is endogenous, and adds negative feedback to the market. We design an experimental housing market and study how the strength of the negative feedback, i.e., the supply elasticity, affects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is offset by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate outcome is well described by a behavioral forecasting heuristics model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.