A Note on Behavioral Economics and Local Housing Markets

Revised January 2018

Arthur O’Sullivan begins a Chapter Titled “Why is housing different”. (See URBEK Methodology.) He cites three reasons: the housing stock is heterogeneous (dwellings have many different characteristics); the stock is durable; and there are costs associated with moving. Shopping for a dwelling incorporates complex consumer choices. Is there a place for behavioral economics in this decision process?

Behavioral economics can be studied in several different ways. Among these are the psychological processes of decision making. Choices can be made based on money value or just rank ordered as a relation.

For example, housing choices typically include decisions about location, size, and design features. A classic hedonic study by Kain and Quigley (1970) shows that size (number of rooms or square feet) and number of bathrooms most heavily influence choice among renters, while among owners the number of bathrooms remains the largest consideration, while size and overall interior quality weigh about equal. A hedonic study is a tool of traditional economics that can yield insights regarding an ordering of choices.

But housing choices also change with age (think focus groups for seniors housing). The decision to spend money to live in a senior’s rental development involves more than just space and bathrooms. As we age, collect more stuff, and start a family, we become “anchored” to our community, neighborhoods, and homes.

“Anchoring” observations can reveal additional considerations. Try and persuade a senior to give up their home! Nationally, more than three-fourths of the householders age 75 and over own their home without a mortgage, yet typically still reluctant to move to a senior’s development regardless of the price offered for their home. But move to be near an adult child? How do you monetize such a choice? Frail seniors often relocate to be near adult children because it will be “more comfortable” for both parties, the senior and adult child.

Traditional economic theory, including the psychology behind choices, play out every day in local housing markets. 

 

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