Housing Market Dynamics: Any News?

59 Pages Posted: 2 Apr 2015

See all articles by Sandra Gomes

Sandra Gomes

Bank of Portugal

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research

Date Written: April 2, 2015


This paper explores the link between agent expectations and housing market dynamics. We focus on shifts in the fundamental driving forces of the economy that are anticipated by rational forward-looking agents, i.e. news shocks. Using Bayesian methods and U.S. data, we find that news-shock-driven-cycles account for a sizable fraction of the variability in house prices and other macroeconomic variables over the business cycle and have also contributed to run-ups in house prices over the last three decades. By exploring the link between news shocks and agent expectations, we show that house price growth was positively related to inflation expectations during the boom of the late 1970’s but negatively related to interest rate expectations during the mid-2000’s housing boom.

Keywords: housing market, Bayesian estimation, news shocks, local identification, financial frictions, survey expectations

JEL Classification: C50, E32, E44

Suggested Citation

Gomes, Sandra and Mendicino, Caterina, Housing Market Dynamics: Any News? (April 2, 2015). ECB Working Paper No. 1775, Available at SSRN: https://ssrn.com/abstract=2588970

Sandra Gomes (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main

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