Date: Wednesday, May 22, 2024 at 11:00 AM Eastern Time

Speaker: Stijn van Niuwerburgh (Columbia GSB)

Paper Title: Understanding Rationality and Disagreement in House Price Expectations

Abstract: Professional house price forecast data are consistent with a rational model where agents must learn about the parameters of the house price growth process and the underlying state of the housing market. Slow learning about the long-run mean generates overreaction to forecast revisions, a modest response of forecasts to lagged realizations and a weak response to contemporaneous realizations and forecast bias. Heterogeneity in signals and prior beliefs about the long-run mean helps the model account for cross-sectional dispersion in forecasts. Introducing behavioral biases, either diagnostic expectations or over-confidence, helps improve the model’s predictions for short-horizon overreaction and dispersion. Using a cross-section of forecasters and a term structure of forecasts are crucial for inference.

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