TY - JOUR
T1 - Home price expectations and behaviour
T2 - Evidence from a randomized information experiment
AU - Armona, Luis
AU - Fuster, Andreas
AU - Zafar, Basit
N1 - Publisher Copyright:
© The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.
Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.
PY - 2019/7/1
Y1 - 2019/7/1
N2 - Home price expectations are believed to play an important role in housing dynamics, yet we have limited understanding of how they are formed and how they affect behaviour. Using a unique “information experiment” embedded in an online survey, this article investigates how consumers’ home price expectations respond to past home price growth, and how they impact investment decisions. After eliciting respondents’ priors about past and future local home price changes, we present a random subset of them with factual information about past (one- or five-year) changes, and then re-elicit expectations. This unique “panel” data allows us to identify causal effects of the information, and provides insights on the expectation formation process. We find that, on average, year-ahead home price expectations are revised in a way consistent with short-term momentum in home price growth, though respondents tend to underpredict the strength of momentum. Revisions of longer-term expectations show that respondents do not expect the empirically-occurring mean reversion in home price growth. These patterns are in line with recent behavioural models of housing cycles. Finally, we show that home price expectations causally affect investment decisions in a portfolio choice experiment embedded in the survey.
AB - Home price expectations are believed to play an important role in housing dynamics, yet we have limited understanding of how they are formed and how they affect behaviour. Using a unique “information experiment” embedded in an online survey, this article investigates how consumers’ home price expectations respond to past home price growth, and how they impact investment decisions. After eliciting respondents’ priors about past and future local home price changes, we present a random subset of them with factual information about past (one- or five-year) changes, and then re-elicit expectations. This unique “panel” data allows us to identify causal effects of the information, and provides insights on the expectation formation process. We find that, on average, year-ahead home price expectations are revised in a way consistent with short-term momentum in home price growth, though respondents tend to underpredict the strength of momentum. Revisions of longer-term expectations show that respondents do not expect the empirically-occurring mean reversion in home price growth. These patterns are in line with recent behavioural models of housing cycles. Finally, we show that home price expectations causally affect investment decisions in a portfolio choice experiment embedded in the survey.
KW - Expectation formation
KW - Housing
KW - Information
KW - Updating
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U2 - 10.1093/restud/rdy038
DO - 10.1093/restud/rdy038
M3 - Article
AN - SCOPUS:85063746882
SN - 0034-6527
VL - 86
SP - 1371
EP - 1410
JO - Review of Economic Studies
JF - Review of Economic Studies
IS - 4
ER -