Reference Points Spillovers: Micro-Level Evidence from Real Estate
68 Pages Posted: 14 Jul 2021 Last revised: 7 Feb 2023
Date Written: June 28, 2021
Abstract
Homeowners who originally bought when market-wide price levels were high (low) fetch high (low) sales prices and rents, even decades later. We study the propagation of such reference-dependence to neighboring listings. The ``spillover'' reference-point effect is about one-half as large as the ``own'' reference-point effect. Neither house quality nor location appears capable of explaining the result. Using a simple model to provide empirical predictions, we find support for a competition-based mechanism. We quantify the aggregate effect of own and spillover reference point effects on aggregate prices and/or rents at the zip code level.
Keywords: Spillovers, Reference Points, Behavioral Biases, House Prices, Rents
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