Noted

Gregory Nemec

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What to expect when expecting a house
How realistic are homebuyers’ expectations about the housing market? In a recent study, Yale economics professor Robert Shiller and an MIT colleague found them fairly accurate for the short run. But, he notes, “the longer run presents a real challenge.”

In 1988 and again from 2003-2021, Shiller’s team surveyed about 7,700 homebuyers about perceptions of trends and how much they thought values would shift over the next year and next decade.

Predictions of short-term fluctuations were generally on target. However, long-term expectations in the early 2000s included an ongoing booming market in which they could make enormous profits.  

During the recovery after the 2007–09 crisis, perceptions of long-term home value growth were again modest. Since 2014, short- and long-term expectations have converged and aligned with price changes. But with the onset of COVID-19, buyers presumed a slowdown that has yet to materialize. 

The professors v. the popularizers
Academic economists and popular finance writers often provide diametrically opposing advice. So whom should we listen to? “Probably both,” says James Choi, a professor of finance at Yale’s School of Management.

Choi compared advice given by 50 popular personal finance books to academic economic models. Those models assume that humans are rational about financial choices. But behavioral economists like Choi recognize decision-making is often driven by noneconomic factors.

Take the question of which debts to pay down first. Traditional economics says that eliminating higher-interest debt first makes sense. But, as noted in several of the books, getting rid of the smallest-balance debt first can provide a sense of accomplishment that builds debt-paying momentum.