1. 2016–2018: The “Silent” Bubble Before Covid, the bubble was silent. There was not much attention from the media and from policymakers. There was some discussion of ‘the everything bubble’, where quantitative easing and monetary policy were accommodating after the financial crisis. A lot of liquidity was injected into the market, and this liquidity ended up in financial markets and in real estate markets. It caused asset prices to surge. This was not the dramatic bubble of the mid-2000s, but it represented a clear departure from normal market behaviour. Our analysis shows that expectations lagged behind reality and people did not fully anticipate how fast prices would climb. This mismatch suggests speculative dynamics were at play, even if they went unnoticed at the time. 2. 2021: The Post-Pandemic Boom After Covid-19 hit, the housing market surged. Low interest rates, government stimulus, and a shift to remote working all contributed to soaring demand. This period saw some of the most extreme price increases in recent memory, with homes selling for well above asking prices and buyers waiving inspections in bidding wars. Once again, people underestimated how quickly prices would rise. Our survey data confirmed what many observers suspected: the market had entered territory where prices seemed disconnected from reasonable expectations. EVERYONE TOGETHER One important aspect of our research is its ability to examine different groups of society separately. The UMSC is a representative sample of the US population, around 500 households who are interviewed every month. They are not experts on the housing market; they come from different socioeconomic and demographic groups. We are looking at the overall population and we are getting a feeling from the overall population, which is a good starting point because you want to see what everybody believes. By having a sample that is representative from the population, you get the views, the mood, of the entire market. This means we can look at gender, for instance, education levels, or those with and without stock investments, where there might be assumed to be differences in their beliefs. One of our interesting findings is that the bubble seems to be consistent across socioeconomic and demographic groups. This suggests housing bubbles can become systemic, affecting the entire market, not just a few hotspots. KEEPING IT REAL Our method’s strength lies in its simplicity and real-time applicability. It requires tracking whether people’s expectations are consistently wrong in ways that suggest speculative behaviour. Understanding how beliefs shape housing markets can help policymakers, regulators, and even everyday buyers make better decisions. For policymakers, this could provide earlier warning signs of dangerous market conditions. For individual homebuyers and investors, understanding these patterns might help inform decisions about when to buy, sell, or wait. Expectation-based tools offer several advantages: • They are timely: Beliefs can shift before hard data like income or rent catches up. Survey data becomes available relatively quickly, potentially allowing for faster identification of concerning trends. • They are detailed: Surveys capture household-level insights across different groups. By tracking consumer expectations alongside traditional economic indicators, regulators and analysts could develop a more complete picture of market conditions. • They are flexible: They do not rely on rigid models or assumptions about what prices “should” be. By paying attention to what people expect, not just what has already happened, we can gain a clearer picture of where the market might be headed. Economists can gain insights that purely technical approaches might miss. Housing bubbles do not always announce themselves. They can build quietly, driven by optimism and reinforced by rising prices. But by listening to what people believe and how those beliefs evolve, we can spot the warning signs earlier. We do not say that our method should replace everything that is being done to monitor the housing market, but this is a useful addition to our arsenal. It will not prevent bubbles, but it can help us see them coming, and that is a crucial step towards protecting financial stability. FIFTY FOUR DEGREES | 21 Professor Efthymios (Themis) Pavlidis is a Professor in the Department of Economics, and CoDirector of both the UK and International Housing Observatories. The latter is run in collaboration with the Globalization and Monetary Policy Institute of the Federal Reserve Bank of Dallas. The working paper Bubbling Up? What Consumer Expectations Reveal About U.S. Housing Market Exuberance, is coauthored by Enrique Martínez-García, of the Federal Reserve Bank of Dallas, and Professor Themis Pavlidis. e.pavlidis@lancaster.ac.uk
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