Home-buyers, Housing and the Macroeconomy

We present the results of a new survey of US home-buyers in 2002. The most important finding is that the survey suggests that home-buyers’ expectations are substantially affected by recent experience. Even after a long boom that has taken prices to very high levels, home-buyers typically have expectations that prices will show double-digit annual price growth over the next 10 years, apparently with only a modest level of risk. We conjecture that these characteristics of individuals’ expectations may contribute to the substantial swings that are observed in housing prices. Changes in housing wealth, especially if they are perceived as long-lasting, may have substantial macroeconomic effects through private consumption. In the second part of the paper, we examine the link between increases in housing wealth, financial wealth, and consumer spending. We rely upon a panel of 14 countries observed annually for various periods during the past 25 years and a panel of US states observed quarterly during the 1980s and 1990s. We find a statistically significant and rather large effect of housing wealth upon household consumption