Is the Behavior of Sellers with Expected Gains and Losses Relevant to Cycles in House Prices?

Abstract

We examine anchoring to the price paid at purchase during an important cycle, 2000-2017. We exploit differences between the actual house price index and one that corrects for loss and gain behavior. Results suggest that anchoring was associated with reductions in observed changes in house prices during the boom (2004-2006) as sellers with gains dominate with their price discounts, and with reduced price declines during the bust (2007-2012) when losses bargained for substantial premiums per dollar loss. This paper extends the anchoring literature which has focused on individual behavior, and it supports new stylized facts associated with housing market cycles.

Keywords: Housing Cycles, Anchoring, Reference Dependence, Price-volume Relationship, Cyclical Turning Points

JEL Classification: E00, G11, N2, R3