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Sale Price Expectations and Mortgage Commitment: Inaccuracy versus Price Setting Behaviour

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  • M.I. Droes
  • W.H.J. Hassink

Abstract

This paper investigates why the homeowner’s expectation about the sale price of a house deviates from its market price. This paper has two distinct contributions. First, we argue that sale price expectations are individual specific. Omitting this individual effect leads to biased hedonic estimates. As a result, hedonic estimates conditional on individual characteristics are preferred. Second, we economically interpret the individual effect in terms of inaccuracy of homeowners and a specific type of price setting behaviour (“fishing for a relatively high selling price†). In particular, we focus on the role of mortgage commitment, which is measured by the loan-to-income ratio. We argue that homeowners with a higher loan-to-income ratio are less likely to move. Consequently, they incur a low opportunity cost of fishing. They are also less inclined to search. As a result, homeowners with a higher loan-toincome ratio might have more incentive to fish for a higher sale price, but they may also be less accurate with regard to the market price. Our estimates confirm these two hypotheses.

Suggested Citation

  • M.I. Droes & W.H.J. Hassink, 2009. "Sale Price Expectations and Mortgage Commitment: Inaccuracy versus Price Setting Behaviour," Working Papers 09-24, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:0924
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    References listed on IDEAS

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    1. Gatzlaff, Dean H. & Haurin, Donald R., 1998. "Sample Selection and Biases in Local House Value Indices," Journal of Urban Economics, Elsevier, vol. 43(2), pages 199-222, March.
    2. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-269, June.
    3. Yannis M. Ioannides & Jeffrey E. Zabel, 2003. "Neighbourhood effects and housing demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(5), pages 563-584.
    4. Chiuri, Maria Concetta & Jappelli, Tullio, 2003. "Financial market imperfections and home ownership: A comparative study," European Economic Review, Elsevier, vol. 47(5), pages 857-875, October.
    5. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    6. Anglin, Paul M & Rutherford, Ronald & Springer, Thomas M, 2003. "The Trade-Off Between the Selling Price of Residential Properties and Time-on-the-Market: The Impact of Price Setting," The Journal of Real Estate Finance and Economics, Springer, vol. 26(1), pages 95-111, January.
    7. Horowitz, Joel L, 1992. "The Role of the List Price in Housing Markets: Theory and an Econometric Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 115-129, April-Jun.
    8. Ihlanfeldt, Keith R. & Martinez-Vazquez, Jorge, 1986. "Alternative value estimates of owner-occupied housing: Evidence on sample selection bias and systematic errors," Journal of Urban Economics, Elsevier, vol. 20(3), pages 356-369, November.
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    10. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
    11. Michel Glower & Donald R. Haurin & Patric H. Hendershott, 1998. "Selling Time and Selling Price: The Influence of Seller Motivation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(4), pages 719-740.
    12. Herrin, William E. & Knight, John R. & Sirmans, C.F., 2004. "Price cutting behavior in residential markets," Journal of Housing Economics, Elsevier, vol. 13(3), pages 195-207, September.
    13. Katherine A. Kiel & Jeffrey E. Zabel, 1999. "The Accuracy of Owner-Provided House Values: The 1978-1991 American Housing Survey," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 263-298.
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    Keywords

    house price; sale price expectation; mark-up; mortgage;

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