Working Paper: NBER ID: w22258
Authors: Michael Bailey; Ruiqing Cao; Theresa Kuchler; Johannes Stroebel
Abstract: We document that the recent house price experiences within an individual’s social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new methodology to document large effects of housing market expectations on individual housing investment decisions and aggregate housing market outcomes. Our approach exploits plausibly-exogenous variation in the recent house price experiences of individuals’ geographically-distant friends as shifters of those individuals’ local housing market expectations. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, (iii) pay 3.3 percent more for a given house, and (iv) make a 7% larger downpayment. Similarly, when homeowners’ friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We also find that when individuals observe a higher dispersion of house price experiences across their friends, this has a negative effect on their housing investments. Finally, we show that these individual-level responses aggregate up to affect county-level house prices and trading volume. Our findings suggest that the house price experiences of geographically-distant friends might provide a valid instrument for local house price growth.
Keywords: Social Networks; Housing Markets; House Price Expectations; Investment Decisions
JEL Codes: D12; D14; D84; G12; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| friends' house price experiences (R21) | transition from renting to owning (R21) |
| friends' house price experiences (R21) | size of purchased homes (R21) |
| friends' house price experiences (R21) | willingness to pay (D11) |
| friends' adverse house price changes (G59) | likelihood to become renters (R21) |
| friends' adverse house price changes (G59) | selling properties at lower prices (R31) |
| increased dispersion in house price experiences (R21) | housing investment decisions (R21) |