IDEAS home Printed from https://ideas.repec.org/a/eee/jhouse/v46y2019ics1051137718300160.html
   My bibliography  Save this article

Natural expectations and home equity extraction

Author

Listed:
  • Pancrazi, Roberto
  • Pietrunti, Mario

Abstract

In this paper we propose a novel explanation for the increase in households’ leverage during the U.S. housing boom in the early 2000s. Specifically, we apply the theory of natural expectations, proposed by Fuster et al. (2010), to show that biased expectations on the two sides of the credit market have been a key determinant of the surge in households’ leverage but also that inaccurate long-run expectations on behalf of financial intermediaries are a necessary - yet so far overlooked - ingredient for matching the observed debt dynamics.

Suggested Citation

  • Pancrazi, Roberto & Pietrunti, Mario, 2019. "Natural expectations and home equity extraction," Journal of Housing Economics, Elsevier, vol. 46(C).
    • Handle: RePEc:eee:jhouse:v:46:y:2019:i:c:s1051137718300160
    DOI: 10.1016/j.jhe.2019.05.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1051137718300160
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jhe.2019.05.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-872, December.
    2. Karl E. Case & Robert J. Shiller & Anne K. Thompson, 2012. "What Have They Been Thinking? Homebuyer Behavior in Hot and Cold Markets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 265-315.
    3. Benítez-Silva, Hugo & Eren, Selçuk & Heiland, Frank & Jiménez-Martín, Sergi, 2015. "How well do individuals predict the selling prices of their homes?," Journal of Housing Economics, Elsevier, vol. 29(C), pages 12-25.
    4. Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 1-48.
    5. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
    6. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    7. Chernenko, Sergey & Hanson, Samuel G. & Sunderam, Adi, 2016. "Who neglects risk? Investor experience and the credit boom," Journal of Financial Economics, Elsevier, vol. 122(2), pages 248-269.
    8. Donald R. Hodgman, 1960. "Credit Risk and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 74(2), pages 258-278.
    9. Calem, P. & Cannon, M. & Nakamura, L.I., 2011. "Credit Cycle and Adverse Selection Effects in Consumer Credit Markets – Evidence from the HELOC Market," Other publications TiSEM 910df767-94d2-4995-933b-2, Tilburg University, School of Economics and Management.
    10. Michael Bailey & Eduardo Dávila & Theresa Kuchler & Johannes Stroebel, 2019. "House Price Beliefs And Mortgage Leverage Choice," Review of Economic Studies, Oxford University Press, vol. 86(6), pages 2403-2452.
    11. John Beshears & James J. Choi & Andreas Fuster & David Laibson & Brigitte C. Madrian, 2013. "What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting," American Economic Review, American Economic Association, vol. 103(3), pages 570-574, May.
    12. Vladimir Klyuev & Paul Mills, 2007. "Is Housing Wealth an “ATM”? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 539-561, July.
    13. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-1727, November.
    14. Garner, Thesia I. & Verbrugge, Randal, 2009. "Reconciling user costs and rental equivalence: Evidence from the US consumer expenditure survey," Journal of Housing Economics, Elsevier, vol. 18(3), pages 172-192, September.
    15. Kuang, Pei, 2014. "A model of housing and credit cycles with imperfect market knowledge," European Economic Review, Elsevier, vol. 70(C), pages 419-437.
    16. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    17. Goodman, John Jr. & Ittner, John B., 1992. "The accuracy of home owners' estimates of house value," Journal of Housing Economics, Elsevier, vol. 2(4), pages 339-357, December.
    18. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 332-368, October.
    19. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    20. John Y. Campbell & João F. Cocco, 2015. "A Model of Mortgage Default," Journal of Finance, American Finance Association, vol. 70(4), pages 1495-1554, August.
    21. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    22. Alejandro Justiniano & Giorgio E. Primiceri & Andrea Tambalotti, 2019. "Credit Supply and the Housing Boom," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1317-1350.
    23. Andreas Fuster & David Laibson & Brock Mendel, 2010. "Natural Expectations and Macroeconomic Fluctuations," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 67-84, Fall.
    24. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2016. "Understanding Booms and Busts in Housing Markets," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1088-1147.
    25. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
    26. Greg Kaplan & Kurt Mitman & Giovanni L. Violante, 2020. "The Housing Boom and Bust: Model Meets Evidence," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3285-3345.
    27. Brueckner, Jan K. & Calem, Paul S. & Nakamura, Leonard I., 2012. "Subprime mortgages and the housing bubble," Journal of Urban Economics, Elsevier, vol. 71(2), pages 230-243.
    28. Jesse M. Abraham & Patric H. Hendershott, 1994. "Bubbles in Metropolitan Housing Markets," NBER Working Papers 4774, National Bureau of Economic Research, Inc.
    29. William Goetzmann & Liang Peng & Jacqueline Yen, 2012. "The Subprime Crisis and House Price Appreciation," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 36-66, January.
    30. Hommes, Cars & Zhu, Mei, 2014. "Behavioral learning equilibria," Journal of Economic Theory, Elsevier, vol. 150(C), pages 778-814.
    31. Meta Brown & Sarah Stein & Basit Zafar, 2015. "The Impact of Housing Markets on Consumer Debt: Credit Report Evidence from 1999 to 2012," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S1), pages 175-213, March.
    32. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
    33. Kristopher Gerardi & Lorenz Goette & Stephan Meier, 2010. "Financial literacy and subprime mortgage delinquency: evidence from a survey matched to administrative data," FRB Atlanta Working Paper 2010-10, Federal Reserve Bank of Atlanta.
    34. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2014. "Wall Street and the Housing Bubble," American Economic Review, American Economic Association, vol. 104(9), pages 2797-2829, September.
    35. Gordon W. Crawford & Michael C. Fratantoni, 2003. "Assessing the Forecasting Performance of Regime‐Switching, ARIMA and GARCH Models of House Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 223-243, June.
    36. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    37. Wenli Li & Rui Yao, 2007. "The Life-Cycle Effects of House Price Changes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1375-1409, September.
    38. Hui Chen & Michael Michaux & Nikolai Roussanov, 2020. "Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty," Journal of Finance, American Finance Association, vol. 75(1), pages 323-375, February.
    39. Alan Greenspan & James E. Kennedy, 2005. "Estimates of home mortgage originations, repayments, and debt on one-to-four-family residences," Finance and Economics Discussion Series 2005-41, Board of Governors of the Federal Reserve System (U.S.).
    40. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis," NBER Working Papers 18082, National Bureau of Economic Research, Inc.
    41. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
    42. Robert J. Shiller, 2007. "Understanding recent trends in house prices and homeownership," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 89-123.
    43. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
    44. Glaeser, Edward L. & Nathanson, Charles G., 2017. "An extrapolative model of house price dynamics," Journal of Financial Economics, Elsevier, vol. 126(1), pages 147-170.
    45. Hu, Xiaoqing, 2005. "Portfolio choices for homeowners," Journal of Urban Economics, Elsevier, vol. 58(1), pages 114-136, July.
    46. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    47. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
    48. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, Decembrie.
    49. Monika Piazzesi & Martin Schneider, 2009. "Momentum Traders in the Housing Market: Survey Evidence and a Search Model," American Economic Review, American Economic Association, vol. 99(2), pages 406-411, May.
    50. Martin Schneider & Monika Piazzesi, 2009. "Momentum traders in a search model of the housing market," 2009 Meeting Papers 1266, Society for Economic Dynamics.
    51. Disney Richard & Gathergood John, 2011. "House Price Growth, Collateral Constraints and the Accumulation of Homeowner Debt in the United States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-30, September.
    52. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patrick Pintus & Jacek Suda, 2019. "Learning Financial Shocks and the Great Recession," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 123-146, January.
    2. Winkler, Fabian, 2020. "The role of learning for asset prices and business cycles," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 42-58.
    3. Caines, Colin, 2020. "Can learning explain boom-bust cycles in asset prices? An application to the US housing boom," Journal of Macroeconomics, Elsevier, vol. 66(C).
    4. Concetta Rondinelli & Roberta Zizza, 2020. "Spend today or spend tomorrow? The role of inflation expectations in consumer behaviour," Temi di discussione (Economic working papers) 1276, Bank of Italy, Economic Research and International Relations Area.
    5. Alban Moura & Olivier Pierrard, 2022. "How well do DSGE models with real estate and collateral constraints fit the data?," BCL working papers 168, Central Bank of Luxembourg.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    2. Piazzesi, M. & Schneider, M., 2016. "Housing and Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1547-1640, Elsevier.
    3. Jørgensen, Peter Lihn, 2023. "The global savings glut and the housing boom," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    4. Paolo Gelain & Kevin J. Lansing & Gisle J. Natvik, 2018. "Explaining the Boom–Bust Cycle in the U.S. Housing Market: A Reverse‐Engineering Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1751-1783, December.
    5. Alessia De Stefani, 2021. "House price history, biased expectations, and credit cycles: The role of housing investors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(4), pages 1238-1266, December.
    6. Pedro Gete, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas.
    7. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    8. Itzhak Ben-David & Pascal Towbin & Sebastian Weber, 2019. "Inferring Expectations from Observables: Evidence from the Housing Market," NBER Working Papers 25702, National Bureau of Economic Research, Inc.
    9. Glaeser, Edward L. & Nathanson, Charles G., 2017. "An extrapolative model of house price dynamics," Journal of Financial Economics, Elsevier, vol. 126(1), pages 147-170.
    10. Theresa Kuchler & Monika Piazzesi & Johannes Stroebel, 2022. "Housing Market Expectations," CESifo Working Paper Series 9665, CESifo.
    11. Zhenyu Gao & Michael Sockin & Wei Xiong, 2020. "Learning about the Neighborhood," NBER Working Papers 26907, National Bureau of Economic Research, Inc.
    12. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    13. Bolt, Wilko & Demertzis, Maria & Diks, Cees & Hommes, Cars & Leij, Marco van der, 2019. "Identifying booms and busts in house prices under heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 234-259.
    14. Daniel L. Tortorice, 2019. "Long-Run Expectations, Learning and the US Housing Market," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(4), pages 497-531, October.
    15. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.
    16. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2018. "Perception of House Price Risk and Homeownership," CEPR Discussion Papers 13195, C.E.P.R. Discussion Papers.
    17. Klaus Adam & Oliver Pfäuti & Timo Reinelt, 2020. "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2020_235, University of Bonn and University of Mannheim, Germany.
    18. Ma, Chao, 2020. "Momentum and Reversion to Fundamentals: Are They Captured by Subjective Expectations of House Prices?," Journal of Housing Economics, Elsevier, vol. 49(C).
    19. Luc Laeven & Alexander Popov, 2017. "Waking Up from the American Dream: On the Experience of Young Americans during the Housing Boom of the 2000s," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(5), pages 861-895, August.
    20. Dong, Ding & Liu, Zheng & Wang, Pengfei & Zha, Tao, 2022. "A theory of housing demand shocks," Journal of Economic Theory, Elsevier, vol. 203(C).

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jhouse:v:46:y:2019:i:c:s1051137718300160. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622881 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.