The Impact of Homeowners' Housing Wealth Misestimation on Consumption and Saving Decisions

Using a unique data set 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.