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. In the model, reference-dependent and loss-averse sellers optimize expected utility from property sales, subject to down-payment constraints, and internalize how their choices affect final outcomes. In the data, listing prices vary asymmetrically with gains and losses since purchase; this relationship is modulated by regional demand nonlinearity; and final sales bunch at zero nominal gains. We find that the price-volume correlation in housing markets is primarily driven by households' reference dependence and down-payment constraints, and only modestly by loss aversion.

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

JEL Classification: D03, D12, D14, G02, G50, R21