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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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Los Angeles MSA
Composite 10
Composite 20
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
ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 5
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
ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 6
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
ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 10
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
ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobai page 11
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