We show that loss aversion is an important feature in explaining sellers’ behavior in the housing market. Data from the 1990-97 boom-bust cycle in downtown Boston show that condominium owners subject to nominal losses 1) set higher asking prices of 25-35 percent of the difference between the expected selling price of a property and their original purchase price; 2) attain higher selling prices of 3-18 percent of that difference; and 3) exhibit a much lower hazard rate of sale than other sellers. The list price results are roughly twice as large for owner-occupants as investors, although they hold for both groups. We also show that the larger the prospective loss, the smaller the marginal mark-up of list price over expected selling. These findings are consistent with the shape of the value function in prospect theory as first proposed by Kahneman and Tversky (1979). They also help explain the strong positive correlation between aggregate prices and volume in this and other real estate markets.
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Paper provided by Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania in its series Zell/Lurie Center Working Papers with number
323.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Amemiya, Takeshi, 1980.
"Selection of Regressors,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(2), pages 331-54, June.
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