The Impact of Noise Trader Sentiment on the Housing Market

Abstract

This paper explores that if noise trader sentiment (NTS) poses effect on the real returns of the U.S. existing one-family homes sold, and by employing the proposed theory of De Long, Shleifer, Summers, and Waldmann (1990), a GARCH-in-mean model, the event study is based on the subprime mortgage crisis. In the past, the valuation for housing prices is placed on the factors in terms of demand and supply. However, after the subprime mortgage crisis, many scholars attempt to explore whether other factors exist in driving this crisis. In particular, are there any speculations or non-rational factors that push the U.S. housing prices up? This paper mainly focuses on the impact of the changes and volatility of noise trader sentiment on the U.S. housing returns. The recent studies have evidenced the effect of noise trader sentiment on stock markets, but such analyses are few in housing markets. Furthermore, we apply the event study to shed light on whether the effect of noise trader sentiment on the U.S. housing markets still exists or not after the subprime mortgage crisis. This paper finds that the effect of noise trader sentiment on the U.S. real housing returns varies across the three subperiods-before, during, and after the subprime mortgage crisis. More importantly, after the crisis, the effect of noise trader sentiment on the U.S. real housing returns disappears.