Sentimental Housing Markets


Using narrative evidence, we investigate the causal effect of consumer confidenceon the housing market dynamics. We adopt an external instrument approach thatis using mass fatalities to identify exogenous variations in consumer confidence. Wefind that adverse sentiment shocks can negatively affect housing demand with astrong and prolonged reduction of house prices and new houses sold. The deteriora-tion of sentiments worsens homeownership conditions, causes a response of monetarypolicy, and exacerbates real consumption spending. In a counterfactual experiment,we assess the importance of the housing market by restricting the response of thehousing market variables to sentiment shock to be zero. The housing market canpropagate the effect of the sentiment shock to the rest of the economy. The effectbecomes particularly evident on longer horizons, specifically after one year, wherethe deviation from the unrestricted model becomes substantial.

Work in Progress