Research Highlights

The House Price Contagion: Blame It On Social Networks

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...individuals consider housing a more risky and less attractive investment after having been exposed, through their friends, to a wider set of possible market outcomes.
Communicating with friends over the Web not only expands social networks and puts wings on information of all sorts, it makes it easier for researchers to track that trail of gossip, real estate chat, and other ephemera. According to new research from NYU Stern Professors Theresa Kuchler and Johannes Stroebel, who used Facebook for their study, news from even far-off friends can affect individual housing investment decisions and spark widespread housing market trends.
 
In “Social Networks and Housing Markets,” Professors Kuchler and Stroebel, along with Facebook’s Michael Bailey and Harvard’s Ruiqing Cao, document that individuals whose geographically distant Facebook friends experienced a 5 percent larger house price increase over the previous two years are themselves more optimistic about property investment. The study found they were therefore 3.1 percent more likely to transition from renting to owning over a two-year period, buy a slightly larger house, pay more than 3 percent more for it, and make a 7 percent larger down payment. This social network effect on buying rather than continuing to rent was more than half as strong as the classic reason for diving into home ownership:  adding a family member. The research sample contained data on 1.4 million people and 525,000 housing transactions over a period from 2008 to 2012. 
 
The study also showed that when friends’ home prices decline, people are more likely to sell their own property, and for less money, and become renters. “This suggests that individuals consider housing a more risky and less attractive investment after having been exposed, through their friends, to a wider set of possible market outcomes,” the authors write.
 
Unsurprisingly, the authors found also that people who regularly talk to their friends about investing in property are more likely to make decisions based on these communications. The collective impact of this phenomenon can affect housing prices and property trading volume across a county – whether or not the trend is merited by economic reality. “We present some evidence that suggests it is unlikely to be the result of purely rational behavior,” the authors say. Nonetheless, they add, their findings might provide an explanation for the degree of regional “house price contagion” that has been observed but poorly understood.