Reference Dependence in the Housing Market

Abstract

We model listing decisions in the housing market, and structurally estimate household preference and constraint parameters using comprehensive Danish data. Sellers optimize expected utility from property sales, subject to down-payment constraints, and internalize the effect of their choices on final sale prices and time-on-the-market. The data exhibit variation in the listing price-gains relationship with "demand concavity;" bunching in the sales distribution; and a rising listing propensity with gains. Our estimated parameters indicate reference dependence around the nominal purchase price and modest loss aversion. A new and interesting fact that the canonical model cannot match is that gains and down-payment constraints have interactive effects on listing prices.

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

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