House Price Perceptions and the Housing Wealth Effect

In this paper, I determine the impact of household house price perceptions on the housing wealth effect. I build a structural model of consumption and housing with endogenous home ownership choice, where house price perceptions differ by home ownership status: renters are fully informed about house price changes, but owners are not. I find that the average marginal propensity to consume out of housing wealth (MPCH) is 2.7 cents in a year out of a $1 housing wealth increase for owners, and this effect is approximately twice as large for owners with full information, on average. Along the cross-section of households, the MPCH is largest for owners who face the highest liquidity and debt constraints, as well as for renters who are most likely to want to purchase a home. I further apply my model to examine the effects of house price perceptions on the transmission of a monetary policy tightening event. I determine that the debt and house price channels become increasingly important in the consumption response compared to the saving channel when the probability of updating perceptions rises in the economy. Focusing on the house price channel, my model predicts that the effectiveness of monetary policy transmission increases at higher levels of perception updating probability.