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

See all articles by Alex R. Horenstein

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics

Daniel Osgood

Columbia University

Avichai Snir

Bar Ilan University - Department of Economics

Date Written: July 1, 2017

Abstract

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

Horenstein, Alex R. and Osgood, Daniel and Snir, Avichai, Out-of-Town Buyers, Mispricing and the Availability Heuristic in a Housing Market (July 1, 2017). Real Estate Finance, Summer 2017. Available at SSRN: https://ssrn.com/abstract=2942808

Alex R. Horenstein

University of Miami - School of Business Administration - Department of Economics ( email )

P.O. Box 248126
Coral Gables, FL 33124-6550
United States

Daniel Osgood

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Avichai Snir (Contact Author)

Bar Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+972 3 736 0835 (Phone)
+972 3 535 3180 (Fax)

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