Finance Seminar（2019-29)

Topic: Optimism and Extrapolation in Home-Price Beliefs

Speaker: Haoyang Liu, Federal Reserve Bank of New York

Time: Wednesday, 30 October, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

Motivated to explain credit cycles and the exuberance of the pre-crisis housing boom, modern macroeconomic and asset pricing models frequently allow some agents to hold extrapolative beliefs—myopically assuming trends in asset prices will continue. However, other models of price momentum actually require under-extrapolation, and survey evidence also finds that the average household under-extrapolates from past house-price growth in forming future house-price expectations. In this paper, we directly characterize the degree of heterogeneity in extrapolation, optimism, and their joint distribution using quantile-regression techniques. We develop a simple new procedure to estimate an individual’s location in the conditional belief distribution and demonstrate its validity in simulations. While the average respondent to our 2015-2019 expectations survey does under-extrapolate from past home-price growth, we find significant covariation in extrapolation and optimism with optimists extrapolating twice as much as the median household. However, importantly for models where optimistic beliefs govern the marginal buyer and move prices, we find that the most optimistic are not overrepresented among likely homebuyers or real-estate investors. Non-participating optimists are the most likely to cite credit constraints as prohibitive, suggesting that the role of extrapolators is pro-cyclical with credit conditions and that extrapolators might currently play a limited role in the housing market.

Introduction：

Dr. Haoyang Liu is an economist in the Capital Markets Function at the Federal Reserve Bank of New York. His research interests are in household finance, mortgage-backed securities, econometrics and machine learning. Haoyang obtained his Ph.D. in Finance from UC Berkeley in May 2017.

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