A literature review
In this paper Kuchler et al. review the recent literature on the determinants and effects of housing market expectations: they look at different factors that affect housing market expectations and how these expectations translate into differences in individuals’ housing market behaviors. They conclude:
The realization that belief formation is neither rational nor easily explained by a few simple factors provides challenges for researchers hoping to create models that accurately capture how beliefs are formed. Indeed, when there are many factors that each explain an important but ultimately small part of the overall dispersion of beliefs, it is complicated to develop canonical models to compete with the rational expectations framework—after all, is it worth moving away from the tractability of rational expectations if the proposed alternative has low explanatory power in the cross-section? We believe that the ideal competing model will depend on the specific question, and expect that not all applications will require researchers to match both the observed time-series and cross-sectional variation in beliefs. In any case, much work remains to be done to translate the growing list of factors that have been shown to influence beliefs into new models of belief formation.
Housing Market Expectations
Authors: Theresa Kuchler, Monika Piazzesi, Johannes Stroebel
From: New York University, Stanford University, New York University
Homebuyer behavior in the US during the last 10 years
Shiller and Thompson look at U.S. homebuyers annual surveys from 2003 through 2021 in four U.S. metropolitan areas in order to shed light on their expectations and reasons for purchasing during the housing boom, collapse and recovery. They find that:
- Homebuyers were generally well informed, and their short-run expectations underreacted to the year-to-year change in actual home prices;
- Housing bubbles can be seen in their long-term (annualized 10-year) home price expectations;
- During the early years of this decade-long rebound both short and long-term expectations were out of line with actual changes in prices but since 2014 long-term expectations have converged with short term expectations;
- With the onset of Covid-19, actual and anticipated appreciation diverged once again: buyers presumed a coming slowdown in the market that has yet to materialize.
Forecasting house prices at this point in history is not a just a matter of judging the progress of a hypothetical bubble. While the rapid increase in home prices is a cause for concern, forecasters must go beyond simple models and to such things as forecasting the COVID-19 epidemic and its future variants, or forecasting international tensions such as those raised by the Russian invasion of Ukraine in February 2022 and Vladimir Putin’s veiled threats to use atomic weapons against nations who support Ukraine. They must also consider the change in supply of housing and in communications technology, and in the changing geographical distribution of business activity, and to the evolution of popular narratives about these things.
What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets: A Ten-Year Retrospect
Authors: Robert J. Shiller, Anne K. Thompson
From: Yale University, MIT
