Reference Points Spillovers: Micro-Level Evidence from Real Estate

Abstract

Homeowners who originally bought when marketwide price levels were high (low) fetch high (low) sales prices and rents, even decades later. We study the propagation of reference-dependence to neighboring listings. The “spillover” reference point effect is about one-half as large as the “own” reference point effect. Neither house quality nor location appears capable of explaining the result. Using a simple model to provide empirical predictions, we find support for a competition-based mechanism. We quantify the aggregate effect of own and spillover reference point effects on aggregate prices and/or rents at the ZIP code level. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online.