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How Well Do Individuals Predict the Selling Prices of Their Homes?

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  • Hugo Benitez-Silva
  • Selcuk Eren
  • Frank Heiland
  • Sergi Jimenez-Martín

Abstract

Self-reported home values are widely used as a measure of housing wealth by researchers; the accuracy of this measure, however, is an open empirical question, and requires some type of market assessment of the values reported. In this study, the authors examine the predictive power of self-reported housing wealth when estimating housing prices, utilizing the portion of the University of Michigan's Health and Retirement Study covering 1992-2006. They find that homeowners, on average, overestimate the value of their properties by 5–10 percent. More importantly, the authors establish a strong correlation between accuracy and the economic conditions at the time of the property's purchase. While most individuals overestimate the value of their property, those who buy during more difficult economic times tend to be more accurate; in some cases, they even underestimate the property's value. The authors find a surprisingly strong, likely permanent, and in many cases long-lived effect of the initial conditions surrounding the purchase of properties, and on how individuals value them. This cyclicality of the overestimation of house prices provides some explanation for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of interest rate increases--which could jeopardize their ability to live up to their financial commitments.

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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_571.

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Date of creation: Aug 2009
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Handle: RePEc:lev:wrkpap:wp_571

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Are people any good at predicting the selling price of their home?
    by Miguel in Simoleon Sense on 2010-08-26 15:07:08
  2. People overvalue their own homes
    by Economic Logician in Economic Logic on 2009-01-16 16:00:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Alice M. Henriques, 2013. "Are homeowners in denial about their house values? comparing owner perceptions with transaction-based indexes," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-79, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael Brocker & Christopher Hanes, 2013. "The 1920s American Real Estate Boom and the Downturn of the Great Depression: Evidence from City Cross-Sections," NBER Chapters, in: Housing and Mortgage Markets in Historical Perspective, pages 161-201 National Bureau of Economic Research, Inc.
  3. Thomas Y. Mathä & Alessandro Porpiglia & Michael Ziegelmeyer, 2014. "Wealth differences across borders and the effect of real estate price dynamics: Evidence from two household surveys," BCL working papers 90, Central Bank of Luxembourg.
  4. Florent Buisson, 2013. "Loss Aversion and Seller Behavior : Evidence from the Housing Market : Comment Working Paper," Documents de travail du Centre d'Economie de la Sorbonne 13005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  5. Kelly, Robert & McCarthy, Yvonne & McQuinn, Kieran, 2011. "Impairment and Negative Equity in the Irish Mortgage Market," Research Technical Papers 9/RT/11, Central Bank of Ireland.
  6. Khalifa, Sherif & Seck, Ousmane & Tobing, Elwin, 2013. "Housing wealth effect: Evidence from threshold estimation," Journal of Housing Economics, Elsevier, Elsevier, vol. 22(1), pages 25-35.
  7. Florent Buisson, 2013. "Loss Aversion and Seller Behavior: Evidence from the Housing Market: Comment Working Paper," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00786294, HAL.
  8. Carin van der Cruijsen & David-Jan Jansen & Maarten van Rooij, 2014. "The rose-colored glasses of homeowners," DNB Working Papers, Netherlands Central Bank, Research Department 421, Netherlands Central Bank, Research Department.
  9. repec:hal:journl:halshs-00786294 is not listed on IDEAS
  10. Thomas Y. Mathä & Alessandro Porpiglia & Michael Ziegelmeyer, 2014. "Household wealth in the euro area: The importance of intergenerational transfers, homeownership and house price dynamics," BCL working papers 91, Central Bank of Luxembourg.
  11. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Unemployment, negative equity, and strategic default," Working Paper, Federal Reserve Bank of Atlanta 2013-04, Federal Reserve Bank of Atlanta.

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