Natural Expectations and Home Equity Extraction

53 Pages Posted: 18 Feb 2015

Date Written: October 23, 2014

Abstract

In this paper we show that long-run expectations about future housing prices of both households and, especially, financial intermediaries had a large impact on households' indebtedness during the recent boom in U.S. housing prices. We introduce the theory of natural expectations in a collateralized credit market model populated by households and banks and find: (1) that mild variations in long-run forecasts of housing prices result in large differences in the amount of home equity extracted during the boom; and (2) that the equilibrium level of debt and the interest rate are particularly sensitive to financial intermediaries' naturalness.

Keywords: natural expectations, home equity extraction, consumption/saving decision, housing price

JEL Classification: E21, E32, E44, D84

Suggested Citation

Pancrazi, Roberto and Pietrunti, Mario, Natural Expectations and Home Equity Extraction (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 984. Available at SSRN: https://ssrn.com/abstract=2566250 or http://dx.doi.org/10.2139/ssrn.2566250

Roberto Pancrazi

Independent

No Address Available

Mario Pietrunti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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