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The Impact of Homeowners' Housing Wealth Misestimation on Consumption and Saving Decisions

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  • Sumit Agarwal

Abstract

Using a unique data set of 81,943 house value estimates by the homeowners and their financial institution, I find that homeowners overestimate their house value by 3.1%. After controlling for homeowners' socioeconomic characteristics, I find that ex ante homeowners who rate (cash-out) refinance an existing loan to increase savings (consumption) are significantly more likely to underestimate (overestimate) their house value. Moreover, overestimators (underestimators) are more likely to increase (reduce) their spending ex post. Finally, I also find that underestimators are more likely to prepay their loans and overestimators are more likely to default on their loans. Copyright 2007 American Real Estate and Urban Economics Association

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  • Sumit Agarwal, 2007. "The Impact of Homeowners' Housing Wealth Misestimation on Consumption and Saving Decisions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 135-154, June.
  • Handle: RePEc:bla:reesec:v:35:y:2007:i:2:p:135-154
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    14. Agarwal, Sumit & Chomsisengphet, Souphala & Hassler, Olivier, 2005. "The impact of the 2001 financial crisis and the economic policy responses on the Argentine mortgage market," Journal of Housing Economics, Elsevier, vol. 14(3), pages 242-270, September.
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    Cited by:

    1. Benítez-Silva, Hugo & Eren, Selçuk & Heiland, Frank & Jiménez-Martín, Sergi, 2015. "How well do individuals predict the selling prices of their homes?," Journal of Housing Economics, Elsevier, vol. 29(C), pages 12-25.
    2. Eileen Diaz McConnell & Ilana Redstone Akresh, 2013. "Home Equity of New Legal Immigrants in the United States: An Evaluation of Three Key Theoretical Perspectives," International Migration Review, Wiley Blackwell, vol. 47(3), pages 686-729, September.
    3. Yvonne McCarthy & Kieran McQuinn, 2016. "Attenuation Bias, Recall Error and the Housing Wealth Effect," Kyklos, Wiley Blackwell, vol. 69(3), pages 492-517, August.
    4. Windsor, Callan & La Cava, Gianni & Hansen, James, 2015. "Home price beliefs: Evidence from Australia," Journal of Housing Economics, Elsevier, vol. 29(C), pages 41-58.
    5. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu, 2016. "An Empirical Analysis of Information Asymmetry in Home Equity Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(1), pages 101-119, February.
    6. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-2156, August.
    7. Gabriele Galati & Federica Teppa & Rob Alessie, 2013. "Heterogeneity in house price dynamics," DNB Working Papers 371, Netherlands Central Bank, Research Department.
    8. Leigh Ann Leung & Catherine Lau, 2017. "Effect of mortgage indebtedness on health of U.S. homeowners," Review of Economics of the Household, Springer, vol. 15(1), pages 239-264, March.
    9. Sheng Guo & William Hardin, 2015. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," Working Papers 1506, Florida International University, Department of Economics.
    10. Caliendo, Frank & Huang, Kevin X.D., 2008. "Overconfidence and consumption over the life cycle," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1347-1369, December.
    11. Carin van der Cruijsen & David-Jan Jansen & Maarten van Rooij, 2014. "The rose-colored glasses of homeowners," DNB Working Papers 421, Netherlands Central Bank, Research Department.
    12. Sheng Guo & William G. Hardin, 2017. "Financial and Housing Wealth, Expenditures and the Dividend to Ownership," The Journal of Real Estate Finance and Economics, Springer, vol. 54(1), pages 58-96, January.
    13. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
    14. Duca, John V. & Kumar, Anil, 2014. "Financial literacy and mortgage equity withdrawals," Journal of Urban Economics, Elsevier, vol. 80(C), pages 62-75.
    15. Yilmazer, Tansel & Babiarz, Patryk & Liu, Fen, 2015. "The impact of diminished housing wealth on health in the United States: Evidence from the Great Recession," Social Science & Medicine, Elsevier, vol. 130(C), pages 234-241.
    16. Callan Windsor & Gianni La Cava & James Hansen, 2014. "Home Price Beliefs in Australia," RBA Research Discussion Papers rdp2014-04, Reserve Bank of Australia.
    17. Mao-wei Hung & Leh-chyan So, 2012. "How Much Extra Premium Does a Loss-averse Owner-occupied Home Buyer Pay for His House?," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 705-722, October.

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