Household Choices with House Value Misperception

Stefano Corradin, Carles Vergara-Alert and Jose Fillat
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Stefano Corradin: European Central Bank
Carles Vergara-Alert: IESE Business School

No 1247, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Households systematically overvalue or undervalue their houses. We compute house value misperception as the difference between self-reported and market house values. Misperception is sizable, countercyclical, and persistent. We find that a 1 percent increase in house overvaluation results in a 4.56 percent decrease in the share of risky stock holdings for those households that participate in the stock market. We then build a rational inattention model in which households make decisions based on their perceived level of housing wealth. Numerical simulations generate the effects of house value misperception on the portfolio choices that we observe in the data.

Date: 2019
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1247

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