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Anchoring to Purchase Price and Fundamentals: Application of Salience Theory to Housing Cycle Diagnosis

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  • John M. Clapp
  • Ran Lu‐Andrews
  • Tingyu Zhou

Abstract

We propose that, in addition to the first price of a repeat pair, sellers also anchor to local fundamentals at the date of the first sale. We redefine an important diagnostic tool for housing cycles by replacing the ratio of house prices to fundamentals with a salient gap: change in market value minus change in local fundamental value between any two sales. Connecticut data shows that the salient gap influences asking and market prices for sellers facing expected gains or losses and that the gap provides early, robust diagnosis of bubble conditions compared to ratios.

Suggested Citation

  • John M. Clapp & Ran Lu‐Andrews & Tingyu Zhou, 2020. "Anchoring to Purchase Price and Fundamentals: Application of Salience Theory to Housing Cycle Diagnosis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1274-1317, December.
    • Handle: RePEc:bla:reesec:v:48:y:2020:i:4:p:1274-1317
    DOI: 10.1111/1540-6229.12259
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    Cited by:

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    3. Tingyu Zhou & John M Clapp & Ran Lu‐Andrews, 2022. "Examining omitted variable bias in anchoring premium estimates: Evidence based on assessed value," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 789-828, September.

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