1. Presented by Ekaterina Chernobaipage 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, Pomona College of Business Administration Department of International Business and Marketing

2. ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 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:

3. ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 3 Idea 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

4. ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 4 Idea Geographical coverage of our 2 surveys: Southern California San Luis Obispo county Santa Barbara county Ventura county

5. ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 5 Idea Some 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

6. ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 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

7. Results ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 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”)

8. Results ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 8 HOT COLD Difference in means NMeanSDMinMax NMeanSDMinMax t-ratiop-values Will stay longer than planned2860.6050.4900.01.0 1990.6330.48301 0.630.5298 Felt like overpaid2903.2760.9771.05.0 2023.1290.94315 -1.670.0961 Originally planned to stay ~1 year2900.1480.3560.01.0 2030.0840.27801 -2.160.031 Originally planned to stay 1-5 years2900.4100.4930.01.0 2030.3650.48201 -1.020.306 Originally planned to stay 6-10 years2900.1900.3930.01.0 2030.2810.4501 2.390.0174 Originally planned to stay 11+ years2900.2450.4310.01.0 2030.2710.44601 0.650.514 coast2890.4080.4920.01.0 2000.430.49601 0.480.6332 investor2900.4970.5010.01.0 2030.4040.49201 -2.040.0423 # of offers2831.8231.2731.012.0 1961.8471.13516 0.210.8349 Descriptive statistics

9. Results ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 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

10. Results ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 10 We did not find meaningful effect of Search Duration on the ROR……….. (?) Effects of remaining variables on the ROR are: HOT COLD RORp-value RORp-value Felt like overpaid * Originally planned to stay ~1 year 1.4010.0026 2.0130.0243 Felt like overpaid * Originally planned to stay 1-5 years 1.3070.0010 1.3180.0093 Felt like overpaid * Originally planned to stay 6-10 years 1.2280.0389 1.0320.7529 Coast 1.0130.9558 2.2040.0110 Investor 0.6880.1175 1.1190.7152 Number of offers 0.9660.6793 0.8390.0925 1 2 3 123 123

11. Results ARES Annual Conference (4/4/2014)Presented by Ekaterina Chernobaipage 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