Alessia De Stefani, Nationalbanken, Denmark

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 upon the history of past house price realizations in the local area of residence. House price expectations are also systematically biased and inefficient: beliefs are over-optimistic following good times and over-pessimistic following bad ones. This systematic bias matters because consumers make financial decisions on the basis of their house price beliefs. Exploiting an exogenous shift in housing sentiment, based on the outcome of US Presidential elections, I show that when individuals expect the value of their properties to rise, they borrow against the anticipated increase in home equity. One standard deviation increase in one-year ahead house price expectations changes the average leverage ratios on long-term fixed-rates mortgages by 6% of a standard deviation.

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Alessia de Stefani received her PhD in Economics from the University of Edinburgh. She is currently employed at the Research Department of Nationalbanken, Denmark. Her research covers topics such as behavioral macroeconomics, household finance and real estate economics.