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Understanding Rationality and Disagreement in House Price Expectations

Author

Listed:
  • Zigang Li
  • Stijn Van Nieuwerburgh
  • Wang Renxuan

Abstract

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 generates overreaction to forecast revisions and a modest response of forecasts to lagged realizations. Heterogeneity in signals and priors about the long-run mean helps the model account for cross-sectional dispersion in forecasts. Introducing behavioral frictions helps improve the model’s predictions for short-horizon overreaction and dispersion. Using a cross-section of forecasters and a term structure of forecasts are crucial for inference.

Suggested Citation

  • Zigang Li & Stijn Van Nieuwerburgh & Wang Renxuan, 2026. "Understanding Rationality and Disagreement in House Price Expectations," The Review of Financial Studies, Society for Financial Studies, vol. 39(2), pages 297-342.
    • Handle: RePEc:oup:rfinst:v:39:y:2026:i:2:p:297-342.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf073
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    Cited by:

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    2. Cocco, João F. & Gomes, Francisco & Lopes, Paula, 2025. "Evidence on expectations of household finances," LSE Research Online Documents on Economics 125547, London School of Economics and Political Science, LSE Library.
    3. Han, Leyla Jianyu, 2025. "Announcements, expectations, and stock returns with asymmetric information," Journal of Monetary Economics, Elsevier, vol. 151(C).
    4. Le blanc, Julia & Slacalek, Jiri & White, Matthew N., 2025. "Housing Wealth Across Countries: The Role of Expectations, Institutions and Preferences," JRC Working Papers in Economics and Finance 2025-01, Joint Research Centre, European Commission.
    5. Liu, Haoyang & Palmer, Christopher, 2026. "Implicit extrapolation and the beliefs channel of investment demand," Journal of Financial Economics, Elsevier, vol. 175(C).
    6. Adam, Klaus & Pfäuti, Oliver & Reinelt, Timo, 2025. "Subjective housing price expectations, falling natural rates, and the optimal inflation target," Journal of Monetary Economics, Elsevier, vol. 149(C).

    More about this item

    Keywords

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    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G50 - Financial Economics - - Household Finance - - - General
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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