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Subjective expectations and house prices

Author

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  • Bro, Jeppe
  • Eriksen, Jonas N.

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.

Suggested Citation

  • Bro, Jeppe & Eriksen, Jonas N., 2025. "Subjective expectations and house prices," Journal of Banking & Finance, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:jbfina:v:172:y:2025:i:c:s0378426624002917
    DOI: 10.1016/j.jbankfin.2024.107377
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    More about this item

    Keywords

    Subjective expectations; House price movements; Variance decomposition; Forecast errors; Belief distortions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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