Macrohistory Seminar – Alessia De Stefani (University of Edinburgh)

Event details

  • | Thursday, January 19
  • 12:15 PM
  • Kaiserplatz 7-9, 4th floor, Room 4.006

Waves of optimism: house price history, biased expectations and credit cycles

Using the Michigan Survey of Consumers, I show that American households have heterogeneous expectations about the future of house prices, which largely depend on the history of past house price realisations in the local area of residence. House price expectations are also systematically biased and inefficient, and as such inconsistent with even weak forms of the rational expectations hypothesis. In particular, house price forecast errors display a strong extrapolative component: expectations are over-optimistic in good times and over-pessimistic in bad times. This systematic bias matters because consumers make financial decisions on the basis of their house price beliefs. Exploiting an exogenous shift in housing sentiment I show that when individuals expect the value of their properties to rise, they borrow against the anticipated increase in home equity. When state-level house price expectations increase by one percentage point, the leverage ratios on individual-level 30 years fixed-rates mortgages increases by 0.5 percentage points (3% of a standard deviation).

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