Manuel Adelino is interested in how housing markets affect real economic activity, through boom and bust and the times between.

A finance professor at Duke University’ Fuqua School of Business, Adelino studied a Fannie Mae survey of 50,000 households from 2010 to 2016 to see what he could learn about how risky an investment Americans perceive housing to be, and what that might mean for home buying patterns. That research is now a working paper for the National Bureau of Economic Research produced with Antoinette Schoar of the Massachusetts Institute of Technology and Felipe Severino of Dartmouth College.

Adelino discusses the findings in this Fuqua Q&A.

How do these findings help explain the housing bubble that burst in 2008?

The evidence we looked at starts in 2010 and so doesn’t say anything about it directly. The role of misapplied credit has been emphasized in the last crash. But we’re convinced that beliefs about what house prices will do in the future also played an important role.

We found that as house prices go up, people tend to believe housing is safer and safer. At the very bottom of the housing cycle in 2011, 66 percent of Americans still believed housing was safe. That is extraordinary, at a time when newspapers were filled with stories of people losing their homes.

As house prices came back up, the share of Americans who believe housing is a safe investment came up to almost 80 percent. This helps explain why people might enter the market at the peak of a boom, and how these attitudes could contribute to inflating bubbles.

Why study attitudes about the risk of housing as an investment? What did that reveal?

We know people rely a lot on their own recent experience to form expectations about what will happen in the future. Past research has shown people in places where house prices have gone up by more are more likely to believe house prices will continue to go up.

We were interested in how people form their beliefs about the risks of home ownership, and how those beliefs affect their decision-making. The average family in the U.S. holds very little in financial assets. By far, the typical family’s biggest investment is a home.

Because a house is an investment you are making for the long term – at least 10 or 15 years in most cases –the risk of that purchase should factor into your decision-making. For example, you might believe a home's value will appreciate by 5 percent each year on average, but you also know there's a chance the market will crash.

We find that 75 percent of households think of housing as a safe investment, whereas only 20 percent think stocks are safe – even though stocks are also a relatively safe investment over a long period of time.

How do attitudes differ between owners and renters, and why does that matter?

The perception of risk in housing is very different between owners and renters.  About 75 percent of owners believe housing is safe, but among renters it’s about 14 percentage points lower, regardless of where in the country we look.

We know owners and renters differ on several measures: Renters tend to have lower incomes, less stable jobs and they tend to move more. All of these factors make them more likely to rent. But we looked at different age, employment and income bands and there is still a difference in perception about the risks of home ownership between owners and renters. Even people with low incomes are more likely to buy a home based on their beliefs about housing risk.

Maybe owners are just trying to justify their investment so they can sleep at night, or maybe renters are trying to make themselves feel better about paying rent.

Regardless of the source of these beliefs, they affect the choices people make. The beliefs people hold about housing as an investment matter to their future choices of whether to own or rent. The help us predict what they will do in the future.

We asked what people would do if they moved now. Even among owners, those who believe housing is more risky said they were more likely to rent in the future.

There are lots of important reasons why people rent rather than own. But if you take this evidence together, differences in beliefs matter more than differences in income, type of job or likelihood of moving.