Betting on the House: Subjective Expectations and Market Choices
111 Pages Posted: 22 May 2020 Last revised: 23 Sep 2021
Date Written: April 25, 2020
Home price expectations play a central role in macroeconomics and finance. However, there is little direct evidence on how these expectations affect market choices. We provide the first causal evidence based on a large-scale, high-stakes, naturally occurring field experiment in the United States. We mailed letters with information on trends in home prices to 57,910 homeowners who recently listed their homes on the market. Collectively, these homes were worth $34 billion. We randomized the information contained in the mailing to create non-deceptive, exogenous variation in the subjects' home price expectations. We then used rich administrative data to measure the effects of these information shocks on the subject's market choices. We find that, consistent with economic theory, higher home price expectations caused a reduction in the probability of selling the home. These effects are highly statistically significant, economically large in magnitude, and robust to a number of sharp checks. Our results indicate that market choices are highly elastic to expectations: a 1 percentage point increase in home price expectations causes a 2.63 percentage point reduction in the probability of selling the property within 12 weeks. Also, our evidence indicates that information frictions play a significant role in the housing market.
Keywords: expectations, experiment, housing market, information
JEL Classification: C81, C93, D83, D84, R31
Suggested Citation: Suggested Citation