Working Paper Revision

Beliefs, Aggregate Risk, and the U.S. Housing Boom

Abstract: Endogenously optimistic beliefs about future house prices can account for the increase, time-path, and volatility of house prices in the U.S. housing boom of the 2000s without shocks to housing preferences. In a general equilibrium model with incomplete markets and aggregate risk, heterogeneous agents endogenously form beliefs about future house prices in response to shocks to fundamentals. When fundamentals like credit conditions loosen, agents can only partially revise up their beliefs, resulting in increasingly optimistic beliefs that are consistent with both novel and existing empirical evidence. Because endogenous beliefs are sensitive to policy interventions, how beliefs are formed in housing booms has direct implications for prudential policy.

JEL Classification: C68; E20; E30; R21;

https://doi.org/10.17016/FEDS.2022.061r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2025-01-31

Number: 2022-061r1

Note: Revision

Related Works

• Working Paper Revision (2025-01-31) : You are here.
• Working Paper Original (2022-09-23) : Beliefs, Aggregate Risk, and the U.S. Housing Boom