The European Central Bank published Working Paper No. 3163 examining how homeowners’ systematic misestimation of their home value affects financial decisions, using U.S. Panel Study of Income Dynamics data and zip-code-level house price indices as a proxy for market values. Using exogenous variation in house values, mortgage debt and misestimation, the authors (writing in a personal capacity) find that overvaluing housing wealth is linked to lower equity exposure alongside higher spending and a greater share of safe assets. Around half of households in the sample misestimated their home value between 1984 and 2021; the average misestimation was close to zero (an average undervaluation of USD 7,600) but dispersion was large (standard deviation USD 59,800). A USD 60,000 increase in house overvaluation (about one standard deviation) is associated with a 1.1 to 1.9 percent decrease in risky stockholdings, a 1.5 to 4.3 percent increase in consumption relative to liquid wealth, and a 1.3 to 2.5 percent increase in the share of risk-free assets over liquid wealth, while stock market participation falls by 1.5 to 3.59 percentage points. The empirical strategy instruments misestimation using proxies for local information availability, including zip-code housing transaction volume and housing-related Google search intensity.
European Central Bank 2025-12-08
European Central Bank working paper finds house price misestimation pushes households toward consumption and safer portfolios
The European Central Bank's Working Paper No. 3163 analyzes the impact of homeowners' misestimation of home values on financial decisions, using U.S. data. Findings indicate that overvaluing housing wealth correlates with reduced equity exposure, increased consumption, and a higher allocation to safe assets. The study highlights significant misestimation among households, with implications for stock market participation and asset allocation.