Thursday, October 25, 2007

A paper on Homeowner's beliefs and how they affect behavior

This is by Sumit Agarwal in the most recent issue of Real Estate Economics.

Using a unique dataset of 81,943 house value estimates by the homeowners and their financial institution, I find that homeowners overestimate their house value by 3.1%. After controlling for homeowners’ socioeconomic characteristics, I find that ex-ante homeowners who rate (cash-out) refinance an existing loan to increase savings (consumption) are significantly more likely to underestimate (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.

Yet something else to worry about...