Divergence from Fundamentals as a Trigger for Changing Price Expectations

Restoration of High-Price Equilibrium through an Upward PDC Shift

Imagine a stable housing market. A widely publicized and credible economic forecast is released, predicting unprecedented job growth and rising incomes over the next several years. As a result, both potential buyers and sellers begin to anticipate that housing prices will be substantially higher in the future, regardless of today's prices. How does this widespread change in expectations about future prices affect the market's Price Dynamics Curve (PDC), which illustrates the relationship between the current price and the price in the next period?

Impact of Changing Expectations on the Price Dynamics Curve

Distinguishing Between Price Shocks and Expectation Shifts

A widespread belief among market participants that future housing prices will be significantly lower, due to an anticipated economic downturn, will cause a movement down along the existing Price Dynamics Curve to a lower price point.