What Have They Been Thinking?: Homebuyer Behavior in Hot and Cold Markets

Abstract

Questionnaire surveys we have undertaken in 1988 and annually 2003-2012 of recent homebuyers in each of four U.S. cities shed light on their expectations and reasons for buying and selling during the recent housing boom and subsequent collapse, and on the reasons for the housing crisis that initiated the current financial malaise. We find that homebuyers were generally well informed, and that their short-run expectations if anything underreacted to the year-to-year change in actual home prices. More of the root causes of the bubble can be seen in their long-term, ten-year, home price expectations, which reached abnormal levels relative to the mortgage rate at the peak of the boom and declined sharply since. The downward turning point around 2005 of the long boom that preceded the crisis was associated with changing public understanding of speculative bubbles.

Identifying Booms and Busts in House Prices Under Heterogeneous Expectations

“…During a housing boom expectations regarding future housing prices are typically optimistic, while they are pessimistic during a bust. There is both anecdotal as well as empirical evidence that house price expectations were unrealistically high in the US during the housing boom (Case et al, 2012;Cheng et al, 2014). This is in line with the observation by Frankel and Froot (1987) that expectations in asset prices are heterogeneous and probably boundedly rational, which ignited the emergence of behavioral finance and heterogeneous agent models (Hommes, 2013).…”

Supply restrictions, subprime lending and regional US house prices

“…Motivated by findings in Abraham and Hendershott (1996), Shiller (2008), Case et al (2012) and Jurgilas and Lansing (2013), we augment our econometric system by lagged house price changes, ∆ph P re−boom i , in order to capture an extrapolative expectation formation. Expectations may affect housing demand both directly, as argued in e.g.…”

“…The latter is accounted for by area-specific supply elasticities depending on both topographical and regulatory supply restrictions. We also explore the relevance of a price-to-price feedback loop, by assuming that price expectations are formed adaptively, which is motivated by results in Abraham and Hendershott (1996), Shiller (2008), Case et al (2012) and Jurgilas and Lansing (2013).…”

Extrapolation and bubbles

“…These historical narratives are supported by more recent research on investor expectations, using both survey data and lab experiments. Case, Shiller, and Thompson (2012) show that in the U.S. housing market, homebuyers' expectations of future house price appreciation are closely related to lagged house price appreciation. Greenwood and Shleifer (2014) present survey evidence of expectations of stock market returns and find strong evidence of extrapolation, including during the internet bubble.…”