Real Estate
Session Chair: Shaun Bond, University of Queensland
Understanding Rationality and Disagreement in House Price Expectations
Renxuan Wang; China Europe International Business School
Zigang Li; Rotman School of Management
Stijn Van Nieuwerburgh; Columbia University
Professional house price forecast data are consistent with a rational model where agents must learn about the parameters of the house price growth process and the underlying state of the housing market. Slow learning about the long-run mean can generate forecast bias, a response of forecasts to lagged realizations, sluggish response of forecasts to contemporaneous realizations, and over-reaction to forecast revisions. Introducing behavioral biases, either over-confidence or diagnostic expectations, helps the model further improve its predictions for short-horizon over-reaction and dispersion. Using panel data for a cross-section of forecasters and a term structure of forecasts are important for generating these results.
Discussant: Hoonsuk Park, University of Melbourne
Spatial Extrapolation in the Housing Market
Gen Li; The University of British Columbia
Individuals form economic expectations for a given region by extrapolating from the economic outcomes of another geographic area, a phenomenon we term 'spatial extrapolation.' We exploit the scenario when Out-of-town (OOT) buyers purchase property in places different from their previous residences. Analyzing roughly 3 million U.S. housing transactions by OOT homebuyers from 2002 to 2017, we find that a 50% increase in the past five-year hometown house prices induces OOT buyers to pay an additional 2% for new OOT properties. We implement two identification strategies to rule out the wealth effect and other channels. First, we compare the purchase price differences among renters, migrants, and second-home (SH) buyers. Second, we construct a belief sensitivity instrumental variable (IV) by combining house price belief and housing transaction data. The IV provides exogenous variation in extrapolative house price belief across locations that is orthogonal to wealth changes. Our research pioneers the exploration of spatial extrapolation and sheds light on the intricate interplay between homebuyer beliefs and behaviors, emphasizing the profound influence of extrapolative belief on local housing market dynamics.
Discussant: Jing Li, Singapore Management University