House Price Determinants: The Roles of Fundamentals and Sentiments

Abstract

This case examines the roles of fundamentals and sentiments in determining house prices by using time series data between January 2000 and June 2015 from the US market. This case can be used as an introduction to behavioral economics and its application to real estate research. It can also facilitate discussions on a wide range of topics, including real estate portfolio management, urban economics, and quantitative research methods in real estate analysis. The real estate market does not satisfy the assumptions of fundamentalists. The searching cost in the property market is considerably higher than those in other asset markets; information asymmetry is also typical. Therefore, house price fluctuation cannot be fully explained by fundamental factors alone. The residential property market has long been an important part of the national economy in the US. The US government has been promoting homeownership through mortgage and tax policies. Consequently, the homeownership rate has stabilized at over 65% for most of the last two decades.