Working Paper: NBER ID: w18400
Authors: Karl E. Case; Robert J. Shiller; Anne Thompson
Abstract: Questionnaire surveys undertaken in 1988 and annually from 2003 through 2014 of recent homebuyers in each of four U.S. metropolitan areas shed light on their expectations and reasons for buying during the recent housing boom and subsequent collapse. They also provide insight into 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 housing bubble can be seen in their long-term (10-year) home price expectations, which reached abnormally high levels relative to mortgage rates at the peak of the boom and have 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.
Keywords: Homebuyers; Housing Market; Expectations
JEL Codes: R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| homebuyers' short-run expectations underreacted to actual year-to-year changes in home prices (D84) | buyers were not overly speculative in the short term (D84) |
| long-term expectations of homebuyers peaked at abnormally high levels relative to mortgage rates (G21) | inflated expectations contributed to the housing bubble (R31) |
| expectations of price increases exceeded actual appreciation between 2003 and 2006 (E31) | homebuyers were overly optimistic about long-term price growth during this period (R21) |
| decline in expectations post-2005 (P27) | contributed to the eventual market correction (G18) |
| expectations were formed through a complex interplay of past price movements and psychological factors (D84) | implications for understanding market behavior (G41) |