Residential Real Estate Price Formation Process
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Stuart Rosenthal, Syracuse University
Prospect Theory, Reverse Disposition Effect and the Housing Market
AbstractWe model a house seller\'s pricing decision under a prospect value function. Our model shows that reference dependence generates a disposition effect, which is magnified by loss aversion. Surprisingly, diminishing sensitivity will lead to a local reverse disposition effect in which a seller's asking price can be decreasing with increasing potential loss. Our model also predicts a larger price dispersion in a cold market and reaffirms the price-volume relation. We find consistent evidence using multiple listing service data in Virginia. Finally, the empirical pricing curve suggests the extent of diminishing sensitivity can vary with the loss/gain position of the agent.
Capitalization as a Two-part Tariff: The Role of Zoning
AbstractIn speculating that local public goods could be efficiently provided, Tiebout (1956) envisioned head taxes which would both finance public goods and price access to them. In practice, head taxes are not available to policy makers, potentially leading to distortions. Hamilton (1975, 1976) responded that zoning can mimic a head tax by create a shadow price (or “ticket”) at the border. While the debate over the efficiency of the local provision of public goods continues, modern empirical work, including structural models of locational choice as well as simple hedonic pricing models, routinely imposes the restriction that local amenities are capitalized through the price of land or housing per unit. The literature has ignored the possibility that they could be capitalized through tickets. This paper extends the literature by using a unique national level dataset of property transactions matched to community level amenities to measure the extent to which local public goods are capitalized into “intercept” (ticket prices) versus “slope” effects (varying prices per unit). We find evidence for both, but the intercept effect is strongest when land use regulation is greater, as predicted by the model.
Momentum and Reversion to Fundamentals: Are They Captured by Subjective Expectations of Asset Prices?
AbstractAsset-price movements (e.g., stock, real estate, and foreign currency) exhibit momentum and reversion to fundamentals. Investors can be either fundamentalists (aware of the fundamental values of assets and expecting asset prices to converge to their fundamental values) or chartists (extrapolating from past momentum to form future expectations). This paper studies real estate markets and finds that households’ subjective house-price expectations capture momentum but not reversion to fundamentals. Moreover, if current house prices are above (below) their fundamental values, households will have even higher (lower) expectations of future appreciation rates. The reason for this pattern is more likely that households do not have accurate estimates of the fundamental value (fundamental-misperception conjecture) than that they do not believe that mispricing will be quickly corrected by the market (mispricing-persistence conjecture).
Federal Reserve Bank of Philadelphia
University of Cincinnati
Jan K. Brueckner,
University of California-Irvine
University of Toronto
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
- R1 - General Regional Economics