The Library
Natural expectations and home equity extraction
Tools
Pancrazi, Roberto and Pietrunti, Mario (2015) Natural expectations and home equity extraction. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1068). (Unpublished)
|
PDF
WRAP_TWERP 1068 Pancrazi.pdf - Requires a PDF viewer. Download (786Kb) | Preview |
Official URL: https://www2.warwick.ac.uk/fac/soc/economics/resea...
Abstract
In this paper we propose a novel explanation for the increase in households’ leverage during the recent boom in U.S. housing prices. We use the U.S. housing market’s boombust episode that led to the Great Recession as a case study, and we show that biased long-run expectations of both households and, especially, financial intermediaries about future housing prices had a large impact on households’ indebtedness. Specifically, first we show that it is likely that financial intermediaries used forecasting models that ignored the long-run mean reversion of housing prices after a short-run momentum, thus leading to an overestimation of future households’ housing wealth. We frame this finding in the theory of natural expectations, proposed by Fuster et al. (2010), to the housing market. Then, using a tractable model of collateralized credit market populated by households and banks, we find that: (1) mild variations in long-run forecasts of housing prices result in quantitatively considerable differences in the amount of home equity extracted during a housing price boom; (2) the equilibrium levels of debt and interest rate are particularly sensitive to financial intermediaries’ naturalness; (3) home equity extraction data are better matched by models in which agents are fairly natural.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
---|---|---|---|---|---|
Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Home equity conversion, Housing -- Prices | ||||
Series Name: | Warwick economics research papers series (WERPS) | ||||
Publisher: | University of Warwick. Department of Economics | ||||
Place of Publication: | Coventry | ||||
ISSN: | 0083-7350 | ||||
Official Date: | 12 May 2015 | ||||
Dates: |
|
||||
Number: | 1068 | ||||
Number of Pages: | 47 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Funder: | Seventh Framework Programme (European Commission) (FP7), European Research Council (ERC) | ||||
Grant number: | 263790 (FP7) | ||||
Related URLs: |
Request changes or add full text files to a record
Repository staff actions (login required)
View Item |