Propagating Experiences by Competing: Micro-Level Evidence from Real Estate

We study the propagation of valuation errors through house prices. Verifying prior research, we first show that house sellers and landlords exhibit long memory: those having purchased when aggregate prices were high (low) ask, and obtain, abnormally high (low) prices and rents many years later. These distortions alter the strategies of nearby sellers and landlords, irrespective of their own historical purchase timing. If competing with one or more “bust-acquired” houses bought from 2008-2012, sellers and landlords accept discounts exceeding 1%. Although bust-acquired houses constitute less than ten percent of all sales, spillovers through competition appear to have aggregate effects. Zip codes with more bust acquired houses are associated with lower prices and rents per square foot.