Do Homeowner Decisions Matter? Implications on Home Price Indices

Abstract

We provide a rational reason why the distribution of home sellers is drastically different during economic downturns than during normal economic times. We show that when the economy enters into a recession, a very small subset of current homeowners will voluntarily choose to put their house on the market to sell. This subset of homeowners is not representative of the total homeowner population, which implies that selection bias may affect observed home transaction prices. Since home price indices use these observed transaction prices, attempts to impute the value of every home in the housing stock is incorrect and will lead to inference issues. We show that home price indices overstate market value depreciation during economic downturns because these indices do not take into account the internal valuation of homeowners. Thus, during the 2007-2009 recession, we should see home price indices overstate home price depreciation. This will have profound effects on previous research that used house price indices in this way.

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Sean Brunson
PhD Candidate Finance

My research interests include real estate, home prices, and mortgages.