Working Paper: CEPR ID: DP2813
Authors: David Genesove; Christopher Mayer
Abstract: Data from downtown Boston in the 1990s show that loss aversion determines seller behaviour in the housing market. Condominium owners subject to nominal losses: (1) set higher asking prices of 25-35% of the difference between the property?s expected selling price and their original purchase price; (2) attain higher selling prices of 3-18% of that difference; and (3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owner-occupants as for investors, but hold for both. These findings are consistent with prospect theory and help explain the positive price-volume correlation in real estate markets.
Keywords: housing markets; loss aversion; prospect theory
JEL Codes: L10; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal losses (G33) | higher asking prices (D49) |
| 10% prospective loss (G33) | 3.6% decrease in weekly hazard rate of sale (C41) |
| nominal losses (G33) | higher transaction prices (D49) |
| owner-occupants (R21) | greater loss aversion than investors (G41) |
| nominal loss (J17) | sensitivity to nominal loss in successful sellers (D40) |
| higher asking prices (D49) | longer time on the market (R31) |