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Misestimating house values: consequences for household finance

Author

Listed:
  • Corradin, Stefano
  • Fillat, José L.
  • Vergara-Alert, Carles

Abstract

This study examines the effect of systematic household misestimation of home prices on financial decisions, including stockholdings, consumption, and asset allocation. Using exogenous variation in house values, mortgage debt, and homeowner misestimation identified through differences in local housing market characteristics, we find that a $60,000 increase in house overvaluation (approximately one standard deviation) results in a 1.1 to 1.9 percent decrease in risky stockholdings, a 1.5 to 4.3 percent increase in consumption, and a 1.3 to 2.5 percent increase in the share of risk-free assets over liquid wealth. The results highlight the need to better understand how housing wealth and beliefs about house values affect portfolio choice, spending, and overall household finance. JEL Classification: G11, D11, D91, R21, C61

Suggested Citation

  • Corradin, Stefano & Fillat, José L. & Vergara-Alert, Carles, 2025. "Misestimating house values: consequences for household finance," Working Paper Series 3163, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253163
    Note: 1103497
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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