Abstract: The recent house price appreciation in the United States has renewed the interest in determining the existence of ”bubbles”. In this paper, we provide a model-free test of rational bubbles and we apply it to the U.S. housing market. Based on the current account identity, we argue that there exists a rational housing bubble when an increase in the current account deficit raises house prices and they are exacerbated in housing supply inelastic municipalities. We empirically apply this test using metropolitan statistical area (MSA) data between 1990 and 2021. We consider three suspect episodes: (i) 1996-2000, (ii) 2002- 2006 and (ii) 2020-21. Our empirical findings are consistent with the existence of only one housing bubble episode, the 2002-06 period. A strength of this test is that it can be easily applied in real time in any country with available micro-level data.

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