The outstanding mortgage principal exceeds the estimated market value of the property for nearly one in four mortgaged residential properties in the United States.  This estimate and other similar analyses and related predictions rely on observed market transactions to estimate housing values. However, because the majority of homeowners have not defaulted on their mortgage or sold their home during the housing market collapse, most behavioral responses to housing wealth changes and negative equity positions are triggered by homeowner’s perception of the value of their property rather than its unobserved potential market price. Examples of household decisions where perceptions of home value are crucial included strategic default, labor supply, and consumption and savings.

While much of the academic literature examining housing price declines and their consequences uses either observed market transactions or self-reported survey valuations of housing prices to assess the extent and impact of housing price changes, earlier research (Kiel and Zabel, 1999) has concluded that homeowners tend to overstate home values. This paper builds on this literature by examining self-reported values in both the restricted access versions of the American Housing Survey and the Health and Retirement Study, using national samples following households from before housing price run-ups through recent years during the ongoing price declines. These versions identify respondents’ neighborhoods, which allows zip-code-level transactions-based estimates of housing price changes to be compared to changes derived from homeowners’ self-reported purchase prices and successively reported current value estimates.

We show that there is substantial variation in differences between the evolution over survey waves in individual reported home values and neighborhood-level market-based estimates. We then explore the extent to which systematic differences in market-based and self-reported values vary with market conditions or are systematically related to factors that may influence homeowner’s perceptions of their housing wealth including recent market trends, time since purchase, and homeowner demographic characteristics. We conclude by exploring the implications of our findings for models and estimates of strategic default decisions and other behavioral responses to housing price changes.