Trend Chasing and Home Price Dynamics: Evidence from a Novel Index Measure of Housing Sentiment
Major Coleman IV
Syracuse University - Whitman School of Management
July 23, 2013
Cash-flow valuation of homes is often not possible, while past returns are easily observable. I hypothesize that trend chasing drives housing markets until the divergence between price and fundamental value --- sentiment --- becomes large and hence more recognizable. I specify home price growth as a function of trend chasing and sentiment correction. To calibrate this specification, I construct index measures of housing sentiment called HSENT. I find home price growth is highly persistent, and reversals in trend are only likely after HSENT becomes extreme. HSENT is negatively related to subsequent housing returns, but positively related to subsequent housing risk.
Number of Pages in PDF File: 54
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: July 24, 2013
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