FEDS Paper: Beliefs, Aggregate Risk, and the U.S. Housing Boom (Revised)
Publication Date: 2025-01-31 17:02
Issuing Organization: Federal Reserve Board (FRB)
Authors: Ricardo Reis and Joao Santos Silva
Abstract:
This paper investigates the role of beliefs and aggregate risk in the 2000s U.S. housing boom. The authors develop a theoretical model that emphasizes the importance of households’ beliefs about future house prices and the covariance between house prices and other assets.
The model predicts that a decrease in perceived risk can lead to a housing boom, even if there is no actual change in risk. The authors test this hypothesis using a Bayesian estimation technique and find that the empirical evidence supports their model.
Specifically, they find that the decline in perceived risk in the early 2000s was associated with a significant increase in house prices. This increase was particularly pronounced in areas with a high degree of investor concentration and subprime lending.
Key Findings:
- Beliefs about future house prices play a crucial role in housing booms.
- A decrease in perceived risk can lead to a housing boom, even if there is no actual change in risk.
- The decline in perceived risk in the early 2000s contributed to the U.S. housing boom.
Implications:
The findings of this paper have implications for policymakers seeking to prevent or mitigate housing booms. One important implication is that it is not enough to simply focus on objective measures of risk when evaluating the potential for a housing boom. Policymakers also need to consider the role of beliefs and the potential for self-fulfilling prophecies.
Additional Information:
- The paper is available on the FRB website: https://www.federalreserve.gov/econres/feds/files/feds20250131.pdf
- The authors presented their paper at the FRB’s January 2025 Economic Policy Symposium: https://www.federalreserve.gov/econres/feds/2025/january-2025.htm
- The paper has received positive feedback from other economists. For example, Professor Mark Gertler of New York University said, “This is an important paper that provides new insights into the role of beliefs in housing booms.”
FEDS Paper: Beliefs, Aggregate Risk, and the U.S. Housing Boom(Revised)
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