DP11272 Social Networks and Housing Markets

Author(s): Michael Bailey, Ruiqing Cao, Theresa Kuchler, Johannes Ströbel
Publication Date: May 2016
Keyword(s): disagreement, Expectation Formation, House Price Dynamics, Social Networks
JEL(s): D12, D14, D84, G12, R21
Programme Areas: Public Economics, Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11272

We document that 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.