The Economic Logic blog by guest posters

Tuesday, January 7, 2014

Are homeowners delusional about the value of their home?

Contributed by H. Economicus.

The recent housing bubble in the US, and others elsewhere before, make you believe that market participants on the real estate markets lack some rationality. While it is true that bubbles can happen even with rational economic agents, this does not exclude the possibility that particularly homeowners may get fooled at least temporarily about the potential value of their home.

Alice Henriques shows that homeowners are quite delusional. When house prices decline as evidenced by some price indexes, they make on average a rather accurate estimate of the change in value of their home, they err only slightly on the optimistic side. But when house prices are booming, their estimates are way off. While CoreLogic reported an increase of 170%, the self-declared values in the Survey of Consumer Finances increased by 200%. This also shows that some results from this survey need to be taken with a grain of salt, as there seems to be some systematic bias.

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