Reference Points Spillovers: Micro-Level Evidence from Real Estate

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