Perception of House Price Risk and Homeownership

Abstract

This paper analyzes the importance of households’ perceptions of house price risk in explaining homeownership choice. While a majority of US households (71%) believes that housing is a “safe” investment, renters are much more likely to perceive housing as a risky investment (conditional on income, savings, location and all other observables). Risk perceptions vary across demographic groups, but significant differences persist after controlling for observables. Current housing decisions and future intentions to buy versus rent are strongly correlated with perceptions of house price risk. Households’ exposure to housing risk due to financial constraints, expected mobility or labor income risk affect the decision to buy versus rent but do not mitigate the impact of risk perceptions on housing choices. Finally, we show that households update their beliefs about the riskiness of housing in response to recent local house price changes. But renters are much slower to update than owners, which might explain the staggered entry into homeownership of different groups in response to house price increases.