Anchoring to Purchase Price and Fundamentals: Application of Salience Theory to Diagnosis of Housing Cycles

https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6229.12259

53 Pages Posted: 30 Aug 2017 Last revised: 6 Aug 2020

See all articles by John M. Clapp

John M. Clapp

University of Connecticut - Department of Finance; Homer Hoyt Institute

Ran Lu-Andrews

California Lutheran University, School of Management

Tingyu Zhou

Florida State University

Date Written: July 3, 2018

Abstract

We propose that, in addition to the first price of a repeat pair, sellers also anchor to local fundamentals at the date of the first sale. We redefine an important diagnostic tool for housing cycles by replacing the ratio of house prices to fundamentals with a salient gap: change in market value minus change in local fundamental value between any two sales. Connecticut data shows that the salient gap influences asking and market prices for sellers facing expected gains or losses and that the gap provides early, robust diagnosis of bubble conditions compared to ratios.

Keywords: Housing Cycles, Disposition Effect, House Prices and Fundamentals, Anchoring, Salience Theory

JEL Classification: E00, G11, N2, R3

Suggested Citation

Clapp, John M. and Lu-Andrews, Ran and Zhou, Tingyu, Anchoring to Purchase Price and Fundamentals: Application of Salience Theory to Diagnosis of Housing Cycles (July 3, 2018). https://onlinelibrary.wiley.com/doi/abs/10.1111/1540-6229.12259, Available at SSRN: https://ssrn.com/abstract=3026863 or http://dx.doi.org/10.2139/ssrn.3026863

John M. Clapp (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-983-3685 (Phone)
860-486-0349 (Fax)

Homer Hoyt Institute ( email )

United States

HOME PAGE: http://hoytgroup.org/weimer-school-and-fellows/

Ran Lu-Andrews

California Lutheran University, School of Management ( email )

60 W. Olsen Road
School of Management
Thousand Oaks, CA California 91360
United States

Tingyu Zhou

Florida State University ( email )

821 Academic Way
Tallahassee, FL 32306
United States

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