Abstract
In this paper we develop and estimate a behavioral model with boundedly rational investors for the U.S. housing market. There are two groups of investors, fundamentalists and chartists. Fundamentalists expect the house price to revert to its fundamental value based on rents, while chartists extrapolate past price trends. Investors are allowed to switch between groups conditional on recent performance. The estimation results show that fundamentalists and chartists are usually present in the market with roughly equal proportions. From 1992 until 2005, however, the proportion of chartists in the market was substantially above the long-term average, such that the house price level climbed far above its fundamental value. In an out-of-sample assessment the model outperforms competing time-series models and predicts the decline of the housing market from 2006 onwards. Finally, the estimated model generates boom-bust price cycles endogenously.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
