Subjective expectations and house prices

Jeppe Bro and Jonas N. Eriksen

Journal of Banking & Finance, 2025, vol. 172, issue C

Abstract: We study U.S. house price movements using a variance decomposition based on subjective expectations data from the University of Michigan’s Survey of Consumers. We find that households’ subjective cash flow (income) expectations account for the dominant share of the overall variation in house prices, whereas subjective discount rate (return) expectations are insignificant. This finding is robust across different samples and subgroups based on home ownership, census regions, income, and age. This contrasts previous evidence from VAR-based models for rational expectations. Households’ ex post forecast errors and ex ante expectational errors are predictable from housing market information and credit conditions.

Keywords: Subjective expectations; House price movements; Variance decomposition; Forecast errors; Belief distortions (search for similar items in EconPapers)
JEL-codes: C32 G12 G14 R31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:172:y:2025:i:c:s0378426624002917

DOI: 10.1016/j.jbankfin.2024.107377

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