A New Index of Housing Sentiment

We propose a new measure for housing sentiment and show that it accurately tracks
expectations of future house price growth rates. We construct the housing sentiment
index using partial least squares on household survey responses to questions about
buying conditions for houses. We …nd that housing sentiment explains a large share
of the time-variation in house prices during both boom and bust cycles and it strongly
outperforms several macroeconomic variables typically used to forecast house prices.