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Misestimating House Values: Consequences for Household Finance

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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.

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  • Stefano Corradin & José Fillat & Carles Vergara-Alert, 2025. "Misestimating House Values: Consequences for Household Finance," Working Papers 25-13, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:102081
    DOI: 10.29412/res.wp.2025.13
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    1. Albert Saiz, 2010. "The Geographic Determinants of Housing Supply," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(3), pages 1253-1296.
    2. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    3. Ihlanfeldt, Keith R. & Martinez-Vazquez, Jorge, 1986. "Alternative value estimates of owner-occupied housing: Evidence on sample selection bias and systematic errors," Journal of Urban Economics, Elsevier, vol. 20(3), pages 356-369, November.
    4. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    5. Marcel Fischer & Michael Z. Stamos, 2013. "Optimal Life Cycle Portfolio Choice with Housing Market Cycles," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2311-2352.
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    Keywords

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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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