Heterogeneous beliefs and housing-market boom-bust cycles

Abstract

This paper presents a business cycle model capturing the stylized features of housingmarket boom-bust cycles in developed countries. The model implies that over-optimism of mortgage borrowers generates housing-market boom-bust cycles, if mortgage borrowers are credit-constrained and savers do not share their optimism. This result holds without price stickiness. If price stickiness is introduced into the model, then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule. Thus, monetary easing observed during housing booms are consistent with the presence of over-optimism causing boom-bust cycles.

Time‐varying impacts of expectations on housing markets across hot and cold phases

“…Following the pioneering studies on asset bubbles by Shiller (2005, 2008), a number of real‐estate literature greatly supports the pivotal role of people's expectations in real‐estate markets. The incomplete list includes Abildgren et al (2018), Burnside et al (2016), Chang et al (2016), Clayton et al (2009), Dieci and Westerhoff (2016), Freybote and Seagraves (2017), Fuster and Zafar (2016), Goetzmann et al (2012), Huang (2013, 2014), Kashiwagi (2014), Lambertini et al (2017), Ling et al (2014), McCarthy and McQuinn (2017), Piazzesi and Schneider (2009), Simsek (2013), Tomura (2013), Zhang (2016), and Zhu et al (2014), among many others. For instance, Burnside et al (2016), Dieci and Westerhoff (2016), Freybote and Seagraves (2017), Kashiwagi (2014), and Piazzesi and Schneider (2009) all put emphasis on the important role of heterogeneous expectations (belief disagreements) in driving housing‐market dynamics.…”

Behavioral Finance as An Alternative Concept in Investor-Related Risk for Residential Projects : A Literature Review

“…Khodeir et al (44) T.S. al Nahdi et al (45) H.Tomura (43) C. Bering er et al 4A. Filip et al (26) Rational Behavior…”

“…In his paper, Tomura [43] show that over-optimism of mortgage borrowers can cause boom-bust cycles, if mortgage borrowers are credit-constrained and savers who supply mortgage loans to mortgage borrowers do not share the over-optimism. Also, in the presence of price stickiness, the model generates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate, given a Taylor rule.…”

Macroeconomic Vulnerability and Disagreement in Expectations

“…Sims (2009) noted first that differences of opinion about the future course of inflation generates over-investment in the real asset, thus implying that monetary policy could contribute to the appearance of bubble-like phenomena by acting or communicating in such a way as to cause divergences in beliefs. The same idea is applied to housing market dynamics by Tomura (2009), who shows that boom-bust cycles as the one the US has experienced during the 2000-2010 decade in housing markets, can occur endogenously if credit-constrained borrowers become overly optimistic and this expectation is neither shared by lenders, nor realized ex post. Favara and Song (2009) note that the nature of the housing stock and the possibility of renting amounts to a de facto short-sale constraint.…”