Trend-Chasing and Home Price Dynamics: Evidence from a Novel Index Measure of Housing Sentiment
Major Coleman IV
Syracuse University - Whitman School of Management
January 22, 2014
Previous studies suggest the housing asset class is vulnerable to sentiment, particularly overextrapolation bias (Shiller (1990)). I specify home price dynamics as a function of overextrapolation-based trend-chasing, and a sentiment-correction when the mispricing becomes large and more recognizable. To calibrate this specification and avoid the difficulties with measuring fundamental values directly, I construct indices of housing sentiment called HSENT. I find momentum dominates the sentiment correction component of price dynamics until HSENT becomes extreme. Over 3-10 years HSENT negatively predicts housing returns, but positively predicts various housing risks, which is consistent with HSENT capturing bias in investor expectations.
Number of Pages in PDF File: 62
Keywords: Housing sentiment, momentum, housing bubble, residential, real estate, behavioral finance
JEL Classification: G02, G11, G12, G14, R31working papers series
Date posted: June 5, 2013 ; Last revised: January 27, 2014
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