Final answer:
When house prices are expected to rise due to factors like job growth or local improvements, you would likely see a change in buyer and seller behavior driven by the theory of rational expectations, which dictates that prices will adjust immediately in anticipation of future events.
Step-by-step explanation:
If you hear that house prices are expected to rise in a few months, you would probably expect to see increased market activity as potential buyers may look to purchase before prices increase, and potential sellers may hold off on selling, anticipating higher future prices. This assumption is based on the theory of rational expectations, which suggests that individuals make decisions based on their rational outlook, available information, and past experiences. This theory dictates that if events are anticipated to push home values up, such as job growth or local amenities like parks or libraries, people will adjust their behavior right away. As a result, buyers may be willing to pay more now, and home prices will reflect those expectations immediately. An understanding of the rational expectations in the real estate market implies awareness that price adjustments occur rapidly in anticipation of future events, not just after they unfold. Therefore, those informed about the potential rise in house prices might act swiftly to capture the value before the market fully adjusts.
In the context of historical trends, like the mid-2000s housing bubble, expectations played a significant role in driving up prices. However, when the bubble burst and prices fell, many assets were not worth as much as expected, leading to a recession. This illustrates the potential risks associated with market expectations if future events do not pan out as anticipated or if rates of increase are unsustainable.