Reference Dependence in the Housing Market
152 Pages Posted: 14 Jun 2019 Last revised: 18 Apr 2022
Date Written: April 15, 2022
We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a "hockey stick" in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained.
Keywords: housing, mortgages, loss aversion, reference dependence, down-payment constraints
JEL Classification: D03, D12, D14, G02, G50, R21
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