Momentum Traders in the Housing Market: Survey Evidence and a Search Model

This paper studies household beliefs dur ing the recent US housing boom. The first part presents evidence from the Michigan Survey of Consumers. To characterize the heterogeneity in households’ views about housing and the econ omy, we perform a cluster analysis on survey responses at different stages of the boom. The estimation always finds a small cluster of house holds that believe it is a good time to buy a house because house prices will rise further. The size of this “momentum” cluster strongly increased toward the end of the boom. The second part of the paper provides a simple search model of the housing market to show how a small number of optimistic investors can have a large effect on prices without buying a large share of the housing stock. The raw survey data suggest that the housing boom had two distinct phases. During the early boom years 2002–2003, a large and increasing fraction of households believed that the time for buying a house was good. This fraction peaked at 85.2 percent in 2003:II. The most important reason—cited by up to 72 percent of house