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Inferring Expectations from Observables: Evidence from the Housing Market

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  • Itzhak Ben-David
  • Pascal Towbin
  • Sebastian Weber

Abstract

We propose a new method to identify shifts in price expectations in the housing market through the accumulation of excess capacity. Expectations of future price increases (due to anticipated future demand for housing services) cause the current supply to increase, creating a temporary vacancy. We implement this intuition in a structural vector autoregression with sign restrictions and explore the effects of price expectations in the U.S. housing market. We find that price expectation shocks were a prime factor explaining the 1996–2006 boom, particularly in the Sand States. Expectation shocks at the boom’s peak reflected implausible growth expectations and reversed during the bust.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:25702
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    1. Calvin He & Gianni La Cava, 2020. "The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets," RBA Research Discussion Papers rdp2020-02, Reserve Bank of Australia.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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