DS News - Digital Archives

Devin G. Pope of the Booth School of Business at the University of Chicago Jaren C. Pope of Brigham Young University Julian C. Jamison, senior economist at the Federal Reserve Bank of Boston Karl E. Case of Wellesley College analyses of bubble arguments, at such a level that few homeowners could grasp the issues. They must have viewed the news accounts of these debates as a sporting event, whose outcome is very uncertain." According to the Case-Shiller-Thompson survey, where are prices going? "Perceptions of where prices are headed turned more positive and expected short-term appreciation in home prices improved in 2012," Projection Bias Meghan R. Busse of the Kellogg School of Management at Northwestern University, Devin G. Pope of the Booth School of Business at the University of Chicago, Jaren C. Pope of Brigham Young University, and Jorge Silva-Risso of the School of Business Administration at University of California, Riverside studied what they called "projection bias" in homebuying decisions. "Consumers are more cautious due to concerns over employment and household finances. [They] are more hesitant to take on additional financial commitments, and a setback to confidence means a setback to the recovery of the housing market." —Doug Duncan, Chief Economist, Fannie Mae they found. "But, at the same time, long-term expectations continue [to] weaken. Thus, while a recovery may be plausible and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of [a] sharp upward turning point in demand for housing that some observers, and media accounts, have suggested." Price and value expectations, according to a separate study, are only one part of the equation, and buyers can easily be influenced. 70 "Projection bias," they wrote, "refers to … the adage, 'never shop on an empty stomach,'" which, they said, is "a caution against projection bias: consumers are likely to overpredict the degree to which their future selves will appreciate the purchases that their current selves crave." In their study, they developed a methodology that enabled them to estimate the value that certain house characteristics (e.g., a swimming pool or central air) have at different times of the year by looking at two different sales for a single house while also controlling for variation in overall housing trends across time and space. "We find evidence," they concluded, "that a swimming pool adds more value to a house that goes under contract in the summertime than it adds to the same house that goes under contract in the wintertime. Specifically, a house with a swimming pool that goes under contract in the summertime sells for an average of 0.4 percentage points more than the same house when it goes under contract in the wintertime . . . Projection bias predicts that consumers will overvalue … housing characteristics (e.g., swimming pools) when the weather is warm at the time of purchase." (They also studied projection bias in auto purchases and found similar projection bias. The choice to purchase a convertible, a four-wheel drive, or a black vehicle is highly dependent on the weather at the time of purchase.) "From a policy perspective," they said, the results "suggest that consumers would benefit from laws designed to help them better evaluate their decisions," providing for a "cooling-off period" for certain purchases. While the Federal Trade Commission has an explicit cooling-off period for some transactions, it does not apply to real estate. Case, Shiller, and Thompson found "longterm expectations have been consistently more optimistic than short-term expectations across both time and location, but the magnitude of the differences fell from a high of 8.3 percent in 2008 to just 0.8 percent in 2012."

• Cover