Reference Points in the Housing Market

Abstract

Using comprehensive and granular Danish data, we revisit the determinants of listing and selling decisions in the housing market. Nominal losses and down-payment constraints significantly and causally affect the gap between listing prices and hedonic valuations. These determinants have interactive effects on household behavior. Reference-dependent loss aversion is most pronounced for unconstrained households, and households experiencing gains raise listing prices at higher levels of home equity, suggesting that gains affect the reference level of desired housing. Demographics also matter–older, poorer, and moderately-educated households exhibit greater reference dependence. We estimate a parsimonious and flexible model of reference points using a generalized logistic function, common in biology, to unify these facts in a tractable framework.

Keywords: housing, mortgages, loss aversion, reference dependence, down-payment constraints

JEL Classification: D03, D12, D14, G02, R21