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How well do individuals predict the selling prices of their homes?

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  • Hugo Benítez-Silva
  • Selcuk Eren
  • Frank Heiland
  • Sergi Jiménez-Martín

    ()

Abstract

Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported. In this research, we study the predictive power of self-reported housing wealth when estimating sales prices utilizing the Health and Retirement Study. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to document a strong correlation between accuracy and the economic conditions at the time of the purchase of the property (measured by the prevalent interest rate, the growth of household income, and the growth of median housing prices). While most individuals overestimate the value of their properties, those who bought during more difficult economic times tend to be more accurate, and in some cases even underestimate the value of their house. These results establish a surprisingly strong, likely permanent, and in many cases long-lived, effect of the initial conditions surrounding the purchases of properties, on how individuals value them. This cyclicality of the overestimation of house prices can provide some explanations for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates which could jeopardize their ability to live up to their financial commitments.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1065.

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Date of creation: Feb 2008
Date of revision: Apr 2008
Handle: RePEc:upf:upfgen:1065

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Self-Reported Housing Values; Housing Prices; Instrumental Variables; Sample Selection; Business Cycle; Interest Rates; Health and Retirement Study;

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References

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Blog mentions

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. 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.
  2. 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.).
  3. 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, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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, Central Bank of Luxembourg 91, Central Bank of Luxembourg.
  9. 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, Central Bank of Luxembourg 90, Central Bank of Luxembourg.
  10. repec:hal:journl:halshs-00786294 is not listed on IDEAS
  11. 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.

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