Perception of House Price Risk and Homeownership

56 Pages Posted: 24 Sep 2018

See all articles by Manuel Adelino

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 2018

Abstract

This paper analyzes the importance of household 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 risky. Risk perceptions vary across demographic groups, but significant differences persist after controlling for observables, such as income, savings, or location. 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 all households update their beliefs about the riskiness of housing in response to past (local) house price changes, but renters are much slower to update than owners. Since renters' decisions to buy are especially sensitive to their perception of house price risk, it might explain their delayed entry into home ownership during a house price run-up and even prolong the housing cycle.

JEL Classification: G28

Suggested Citation

Adelino, Manuel and Schoar, Antoinette and Severino, Felipe, Perception of House Price Risk and Homeownership (September 2018). CEPR Discussion Paper No. DP13195. Available at SSRN: https://ssrn.com/abstract=3254230

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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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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