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Social Networks and Housing Markets

Listed author(s):
  • Michael Bailey
  • Ruiqing Cao
  • Theresa Kuchler
  • Johannes Ströbel

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 5905.

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Date of creation: 2016
Handle: RePEc:ces:ceswps:_5905
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