Essays in Household Finance and Housing Economics

With the wake of the United States financial crisis in 2008, policymakers and academics have begun to reevaluate the nature and impact of household financial decisions. While standard economic theory assumes individuals are fully rational, the devastation of the crisis suggests households may be subject to systematic biases that can have significant effects on the economy. Chapter 1 asks whether consumer sentiment has an impact on asset prices, particularly during the boom and bust of housing prices that instigated the most recent financial crisis. Empirically identifying a link between sentiment and prices is challenging, however, as measures of investor beliefs are difficult to construct. This paper develops the first measures of sentiment across local housing markets by quantifying the tone in local housing newspaper articles. The sentiment index forecasts both the boom and bust of housing prices by more than two years, and can predict over 70 percent of the variation in national housing prices above and beyond economic fundamentals. Chapter 2 then asks whether households can time the own versus rent decision successfully and generate profitable savings. Using 29 years of historical data, this essay creates robust measures of the costs of owning and renting and evaluates whether owning or renting was less expensive ex-post across 39 metropolitan areas in the United States. We find that households can potentially time their homeownership profitably and can save as much as 50 percent of annual rent costs using a few simple trading rules. Chapter 3 addresses whether the lack of household financial literacy has significant consequences for household wealth. We find that an overwhelming majority of households lack basic financial skills and that financial literacy appears to have a significant effect on wealth above and beyond other observed factors. Our results suggest that improving financial literacy could have large positive effects on wealth accumulation