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José L. Fillat
- 8 December 2025
- WORKING PAPER SERIES - No. 3163Details
- Abstract
- This study examines the effect of systematic household misestimation of home prices on financial decisions, including stockholdings, consumption, and asset allocation. Using exogenous variation in house values, mortgage debt, and homeowner misestimation identified through differences in local housing market characteristics, we find that a $60,000 increase in house overvaluation (approximately one standard deviation) results in a 1.1 to 1.9 percent decrease in risky stockholdings, a 1.5 to 4.3 percent increase in consumption, and a 1.3 to 2.5 percent increase in the share of risk-free assets over liquid wealth. The results highlight the need to better understand how housing wealth and beliefs about house values affect portfolio choice, spending, and overall household finance.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory
D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving
R21 : Urban, Rural, Regional, Real Estate, and Transportation Economics→Household Analysis→Housing Demand
C61 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Optimization Techniques, Programming Models, Dynamic Analysis
- 21 September 2012
- WORKING PAPER SERIES - No. 1470Details
- Abstract
- We generalize the classic Grossman and Laroque (1990) (GL) model of optimal portfolio choice with housing and transaction costs by introducing predictability in house prices. As in the GL model, agents only move to more expensive (cheaper) houses when their wealth-to-housing ratios reach an optimal lower (upper) boundary. However, in our model, these boundaries are time-varying and depend on the dynamics of the expected growth rate of house prices. We find that households moving to a more expensive house in periods of high expected growth in house prices have significantly lower ex-ante wealth-to-housing ratios than those moving in periods of low expected growth. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices and that it is higher right before moving during periods of low growth. The main implications of the model are robust to tests using household level data from the PSID and SIPP surveys.
- JEL Code
- G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
D11 : Microeconomics→Household Behavior and Family Economics→Consumer Economics: Theory
D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving
C61 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Optimization Techniques, Programming Models, Dynamic Analysis