Social Networks and Housing Markets

74 Pages Posted: 29 Mar 2016 Last revised: 11 May 2016

Michael C. Bailey

Facebook

Ruiqing Cao

Harvard University

Theresa Kuchler

New York University (NYU)

Johannes Stroebel

New York University (NYU); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 23, 2016

Abstract

We document that the recent house price experiences within an individual’s social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new methodology to document large effects of housing market expectations on individual housing investment decisions and aggregate housing market outcomes. Our approach exploits plausibly-exogenous variation in the recent house price experiences of individuals’ geographically-distant friends as shifters of those individuals’ local housing market expectations. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, (iii) pay 3.3 percent more for a given house, and (iv) make a 7% larger downpayment. Similarly, when homeowners’ friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We also find that when individuals observe a higher dispersion of house price experiences across their friends, this has a negative effect on their housing investments. Finally, we show that these individual-level responses aggregate up to affect county-level house prices and trading volume. Our findings suggest that the house price experiences of geographically-distant friends might provide a valid instrument for local house price growth.

Keywords: Social Networks, Expectation Formation, Disagreement, House Price Dynamics

JEL Classification: G12, D12, D14, D84, R21

Suggested Citation

Bailey, Michael C. and Cao, Ruiqing and Kuchler, Theresa and Stroebel, Johannes, Social Networks and Housing Markets (March 23, 2016). Available at SSRN: https://ssrn.com/abstract=2753881 or http://dx.doi.org/10.2139/ssrn.2753881

Michael C. Bailey

Facebook ( email )

1601 S. California Ave.
Palo Alto, CA 94304
United States

Ruiqing Cao

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Theresa Kuchler

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

Johannes Stroebel (Contact Author)

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

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