Out-of-Town Buyers, Mispricing and the Availability Heuristic in a Housing Market
Real Estate Finance, Summer 2017
24 Pages Posted: 29 Mar 2017 Last revised: 24 Jan 2018
Date Written: July 1, 2017
There is evidence that asymmetric information in the housing market between sellers and buyers is an important source of mispricing, especially when involving out-of-town buyers (Chinco and Mayer 2016, Kurlat and Stroebel 2015). In this paper we show that a specific cognitive bias, the availability heuristic, can exacerbate pricing errors in an environment with asymmetric information and out-of-town buyers. When people use the availability heuristic, they make their judgments based on the most salient, rather than the most relevant information. Through studying Arizona’s market for ranchettes, small ranches located near main urban areas, we find that non-Arizona buyers who purchase ranchettes earn smaller returns than Arizona buyers. Furthermore, we find that there is also a difference in realized returns between different non-Arizona buyers that is related to variations in the natural landscape at the time they visit the prospective property. As such, we find that non-Arizona buyers base their predictions about amenities on the observations they made while visiting, even when these observations are not representative.
Keywords: Availability Heuristic, Cognitive biases, Mispricing, Real estate
JEL Classification: D01, L11, R32
Suggested Citation: Suggested Citation