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Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported. In this study, we examine the predictive power of self-reported housing wealth when estimating housing prices, utilizing the portion of the University of Michigan’s Health and Retirement Study covering 1992–2006. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to establish a strong correlation between accuracy and the economic conditions at the time of the property’s purchase. While most individuals overestimate the value of their property, those who buy during more difficult economic times tend to be more accurate, in some cases even underestimating the value of their house. We find a surprisingly strong, likely permanent, and in many cases long-lived effect of the initial conditions surrounding the purchase of properties, and on how individuals value them. This cyclicality of the overestimation of house prices provides some explanation for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates, which could jeopardize their ability to live up to their financial commitments.
Source:”How Well Do Individuals Predict the Selling Prices of Their Homes?” from The Levy Economics Institute Working Paper Collection No. 571
One of my favorite books covers a lot of places where you don’t want to live: Holidays in Hell: In Which Our Intrepid Reporter Travels to the World’s Worst Places and Asks, is a hysterical book by P.J. O’Rourke. I highly recommend checking it out if you enjoy humor, travel or humorous travel.
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