Determinants of house buyers’ expected holding periods in boom and bust markets in California
International Journal of Housing Markets and Analysis
ISSN: 1753-8270
Article publication date: 3 April 2017
Abstract
Purpose
This study aims to investigate the determinants of homeowners’ planned holding periods. Real estate market is known for displaying buying and selling behavior that does not conform to traditional economic theories such as rational expectation or expected utility. Mounting evidence of anomalous observations appear to be supported by other theories, such as prospect theory, which in particular helps explain the disposition effect – sellers are too quick to sell when prices are climbing and hold on to properties longer when prices are plummeting. While this evidence is widely documented in housing studies based on data on realized holding periods (i.e. ex post), this study explores factors that may motivate homeowners to alter their expected holding horizons (i.e. ex ante) to form new preferred holding periods that may be shorter or longer than those planned during house search.
Design/methodology/approach
The empirical study uses data collected from two cross-section surveys of recent homebuyers in rising and declining housing markets in Southern California in 2004-2005 and 2007-2008, respectively.
Findings
The empirical results demonstrate that in addition to the financial characteristics of the recent homebuyer, the characteristics of the buying experience – non-monetary, such as the realized search duration, and monetary, such as perception of negative or positive premium paid for the house relative to its market value – have a statistically significant effect on the holding horizon revision. The data strongly indicate that the perception of having overpaid increases the likelihood of upward revision of the original holding horizon. This effect is stronger in the declining than in the rising market – a crucial finding that mirrors the disposition effect.
Originality/value
This study sheds new light on what may contribute to the disposition effect in housing markets that has not yet been investigated in past literature. The novel approach here is to look at how different house price environments may affect homeowners’ holding periods ex ante when they begin, rather than ex post when already realized.
Keywords
Acknowledgements
The authors are most grateful to Bill Watkins and his team at the Center for Economic Research and Forecasting at the California Lutheran University and The First American Title Company in Santa Barbara, California, for helping them with the distribution of their surveys. The authors also thank California State Polytechnic University Pomona and the University of California Santa Barbara for their financial support. The authors thank the anonymous referees and the session participants at the American Real Estate Society annual conference in 2014 for their valuable comments.
Citation
Chernobai, E. and Hossain, T. (2017), "Determinants of house buyers’ expected holding periods in boom and bust markets in California", International Journal of Housing Markets and Analysis, Vol. 10 No. 2, pp. 256-281. https://doi.org/10.1108/IJHMA-05-2016-0034
Publisher
:Emerald Publishing Limited
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