Aggregate Implications of Belief Heterogeneity
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Jose Scheinkman, Columbia University
Learning About the Neighborhood
AbstractWe develop a model of neighborhood choice to analyze information aggregation and learning in residential and commercial real estate markets. In the presence of pervasive informational frictions, housing prices serve as important signals to households and commercial real estate developers about the economic strength of a neighborhood. Through this learning channel, noise from supply and demand shocks can propagate from housing prices to real activity, distorting not only migration into the neighborhood, but also the supply of commercial real estate as it is an input to production. Our analysis helps to rationalize the commercial real estate boom that accompanied the recent U.S. housing boom, even though commercial real estate was not subject to the household credit expansion that had contributed to the housing boom.
A Risk-centric Model of Demand Recessions and Macroprudential Policy
AbstractWhen investors are unwilling to hold the economy's risk, a decline in the interest rate increases the Sharpe ratio of the market and equilibrates the risk markets. If the interest rate is constrained from below, risk markets are instead equilibrated via a decline in asset prices. However, the latter drags down aggregate demand, which further drags prices down, and so on. If investors are pessimistic about the recovery, the economy becomes highly susceptible to downward spirals due to dynamic feedbacks between asset prices, aggregate demand, and growth. In this context, belief disagreements generate highly destabilizing speculation that motivates macroprudential policy.
House Price Beliefs and Leverage Choice
AbstractWe study the effects of homebuyers' beliefs about future house prices on mortgage leverage choice. We first show that, from a theoretical perspective, the relationship between homebuyers' beliefs and leverage choice is ambiguous, and depends on homebuyers' willingness to adjust their house size in response to beliefs about future house price changes. When households primarily maximize the levered return of their property investment, more optimistic homebuyers take on more leverage to purchase larger houses and profit from the greater perceived price appreciation (housing-as-investment scenario). On the other hand, when considerations such as family size pin down the desired property size, more optimistic homebuyers take on less leverage to finance that property of fixed size, since they perceive a higher marginal cost of borrowing (housing-as-consumption scenario). To determine which scenario better describes the data, we empirically investigate the cross-sectional relationship between beliefs and leverage in the U.S. housing market. Our data combine mortgage financing information and a housing expectation survey with anonymized social network data from Facebook. The survey documents that an individual's belief distribution about future house price changes is affected by the recent house price experiences of her geographically-distant friends, allowing us to exploit these experiences as quasi-orthogonal shifters of individuals' beliefs. We show that more optimistic homebuyers use less leverage, consistent with the housing-as-consumption scenario; as predicted by the model, the cross-sectional relationship between beliefs and leverage choice is largest during periods when agents expect prices to fall on average.
University of Pennsylvania
New York University
- E3 - Prices, Business Fluctuations, and Cycles