Perception of House Price Risk and Homeownership

49 Pages Posted: 25 Jun 2018 Last revised: 2 Aug 2018

Manuel Adelino

Duke University; Duke Innovation & Entrepreneurship Initiative; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Felipe Severino

Dartmouth College - Tuck School of Business

Date Written: July 24, 2018

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.

Suggested Citation

Adelino, Manuel and Schoar, Antoinette and Severino, Felipe, Perception of House Price Risk and Homeownership (July 24, 2018). Available at SSRN: https://ssrn.com/abstract=3197973 or http://dx.doi.org/10.2139/ssrn.3197973

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

50 Memorial Drive, E52-447
Cambridge, MA 02142
United States
617-253-3763 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Felipe Severino

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.dartmouth.edu/~fseverino

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