Using the Michigan Survey, I show that consumers' house price expectations depend upon the recent history of house price developments in their city of residence. Forecast errors are predictable: people systematically underestimate momentum and neglect mean reversion, remaining over-optimistic for several quarters after a prolonged trend of house price growth, and vice versa. Housing appreciation also increases the share of consumers who believe that real estate is a good investment. Combining loan-level data from Freddie Mac to regional measures of housing sentiment, I show that an exogenous shift in house price expectations leads to an increase in leverage on new mortgage originations. The effect is concentrated on investment properties and among prime borrowers in nonrecourse states.
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Growth rates of income inequality and household debt levels are strongly correlated within OECD economies. I explain this evidence through the role of collateral capacity and mortgage lending. My analysis of disaggregated US data in the decade preceding the 2007/2008 financial crisis shows how the rise in income inequality across US regions was associated with a higher than average increase in house prices. Exploiting geographical variation across US regions, I apply a methodology which can be considered similar to a diff-in-diff approach. I show that between 1997 and 2007 a 1% increase in inequality, measured as the ratio of top incomes to median incomes, determined an increase in the self-reported value of homes of about 0.6% across US states and 0.7% across metro areas. Inequality therefore induced a wealth effect in homeowners. I also show that the increase in housing wealth was associated with higher consumption, despite constant real income. A 1% increase in top incomes induced a 0.46% increase in "non-rich" homeowners' consumption, and a 0.18% increase in mortgage debt. The wealth effect experienced by homeowners living in highinequality regions can therefore explain the link between inequality and household debt without recourse to behavioral explanations such as the "conspicuous consumption" hypothesis.
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