Presented by Ekaterina Chernobai page 1ARES Annual Conference (4/4/2014) 1

Does House Search Quality Impact the Disposition Effect?

Ekaterina Chernobai

California State Polytechnic University, Pomona College of Business Administration

Department of Finance, Real Estate, and Law

Tarique Hossain

California State Polytechnic University, PomonaCollege of Business AdministrationDepartment of International Business and Marketing

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 2

Idea

• Does homebuyers’ experienced house search have an impact on future (ex ante) holding period?

• Any differences in the effects in “hot” and “cold” housing markets?

DISPOSITION EFFECT

= Sell winners too quickly, hold losers for too long

This is an empirical evidence based on realized (ex post) holding periods

We analyze:

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 3

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2004-2005 survey of recent house buyers

We run 2 surveys:

2007-2008 survey of recent house buyers

• Same geographic area in S. California (Santa Barbara, San Luis Obispo, Ventura counties)• Same average house price in both time periods

January 2000 = 100

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 4

Idea

Geographical coverage of our 2 surveys: Southern California

San Luis Obispo county

Santa Barbara county

Ventura county

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IdeaSome past studies:

“Disposition Effect”

• Odean (1998), Genesove & Mayer (2001), many other

Irrationality in real estate investor behavior: “sell winners” & “hold losers” (Also evident in financial markets)

Common explanations:• “Prospect Theory” by Kahneman & Tversky (1979)

Prospect Theory of decision making with risky alternatives: Risk-averse when facing gains, risk-taker when facing losses

• “Mental accounting”. E.g., Einio, Kaustia & Puttonen (2008)

Helsinki apartment sales: disproportionate number of sales occurred at exactly / or 50% / or 25%/ or 33% above the original purchase price

• “Loss realization aversion”. E.g., Genesove & Mayer (2001)

Boston condo sales: asking prices > E[selling prices] in declining market extending their TOM

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Research Questions

Questions of interest:

1.) Any effect on the planned home occupancy period of realized search duration?

2.) Any effect on the planned home occupancy period of the perception of the purchase being worth the money?

3.) Any differences in 1.) and 2.) between “hot” and “cold” markets?

Our hypotheses:

Positive relationship

Negative relationship

Results

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 7

2004-2005 survey

Mailed 6,000 questionnaires

Response rate: 11.3% (661)

2007-2008 survey

Mailed 6,200 questionnaires

Response rate: 11.6% (719)

housing bubble (“hot”)

peak

housing decline (“cold”)

Results

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 8

  HOT   COLD Difference in means

N Mean SD Min Max N Mean SD Min Max t-ratio p-values

Will stay longer than planned 286 0.605 0.490 0.0 1.0 199 0.633 0.483 0 1 0.63 0.5298

Felt like overpaid 290 3.276 0.977 1.0 5.0 202 3.129 0.943 1 5 -1.67 0.0961

Originally planned to stay ~1 year 290 0.148 0.356 0.0 1.0 203 0.084 0.278 0 1 -2.16 0.031

Originally planned to stay 1-5 years 290 0.410 0.493 0.0 1.0 203 0.365 0.482 0 1 -1.02 0.306

Originally planned to stay 6-10 years 290 0.190 0.393 0.0 1.0 203 0.281 0.45 0 1 2.39 0.0174

Originally planned to stay 11+ years 290 0.245 0.431 0.0 1.0 203 0.271 0.446 0 1 0.65 0.514

coast 289 0.408 0.492 0.0 1.0 200 0.43 0.496 0 1 0.48 0.6332

investor 290 0.497 0.501 0.0 1.0 203 0.404 0.492 0 1 -2.04 0.0423

# of offers 283 1.823 1.273 1.0 12.0 196 1.847 1.135 1 6 0.21 0.8349

Descriptive statistics

Results

ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 9

Decided to stay longer in the purchased house than originally planned

as a function of:

• Felt like overpaid * Originally planned to stay ~1 year• Felt like overpaid * Originally planned to stay 1-5 years• Felt like overpaid * Originally planned to stay 6-10 years

Decided to stay shorter in the purchased house than originally planned

• Felt like overpaid * Originally planned to stay 11+ years• Bought in a coastal zip code• Investor• Number of offers made during search

• Realized search duration

Estimate Relative Odds Ratio (ROR):

Quality of experienced house search

Results

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We did not find meaningful effect of Search Duration on the ROR……….. (?)

Effects of remaining variables on the ROR are:

 HOT  COLD

ROR p-value ROR p-value

Felt like overpaid * Originally planned to stay ~1 year 1.401 0.0026 2.013 0.0243

Felt like overpaid * Originally planned to stay 1-5 years 1.307 0.0010 1.318 0.0093

Felt like overpaid * Originally planned to stay 6-10 years 1.228 0.0389 1.032 0.7529

Coast 1.013 0.9558 2.204 0.0110

Investor 0.688 0.1175 1.119 0.7152

Number of offers 0.966 0.6793 0.839 0.0925

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Results

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In other words,

• More costly house search appears to force buyers to extend their planned holding period – this is true in both Rising and Declining markets

• The ex post realized holding periods appear to be biased toward shorter-term buyers

These shorter-term buyers: - are more likely to decide to stay longer when the ex ante search was perceived to be a worse deal

- choose to amortize their higher realized search costs over a longer holding horizon