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

A number of studies point out that homeowners on average misestimate their house values. Using a unique dataset of 81,943 house value estimates both by the homeowners and the bank, I find that homeowners overestimate their house value by 3.1%. After controlling for homeowners' socioeconomic characteristics, I find that homeowners who "rate refinance" an existing loan to increase lifetime savings are significantly more likely to underestimate their house value, while homeowners who "cash-out refinance" an existing loan to fund current consumption are significantly more likely to 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.

Agarwal, Sumit, The Impact of Homeowners' Housing Wealth Misestimation on Consumption and Saving Decisions (June 2006). Available at SSRN: https://ssrn.com/abstract=906143 or http://dx.doi.org/10.2139/ssrn.906143