The Determinants of Buyer Search Duration in “Hot” and “Cold” Residential Real Estate Markets

1. The Determinants of Buyer Search Duration in “Hot” and “Cold” Residential Real Estate Markets • Ekaterina Chernobai • California State Polytechnic University, Pomona, U.S.A. • College of Business Administration • Department of Finance, Real Estate, and Law • University of Nürtingen, Germany (Visiting Professor) • Department of Real Estate Management • Tarique Hossain • California State Polytechnic University, Pomona, U.S.A. • College of Business Administration • Department of International Business and Marketing

2. Idea Seller side Buyer side Housing liquidity Time on the market Time to buy • We analyze: • Determinants of search duration • Differences in the effects in “hot” and “cold” housing markets • Differences between private investors and non-investors • Also: • Effects of “subprime crisis” Presented by Ekaterina Chernobai ERES 2011, Eindhoven

3. Idea We run: 2004-2005 survey of recent house buyers 2007-2008 survey of recent house buyers January 2000 = 100 • Same geographic area in Southern California – most pronounced “bubble” • Same average house price in both time periods Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 3

4. Idea Geographical coverage of the surveys California San Francisco San Luis Obispo county Santa Barbara county Ventura county Los Angeles San Diego Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 4

5. Idea Some past studies of search duration: • Case and Shiller (1988) “The Behavior of Home Buyers in Boom and Post-Boom Markets” • - House purchases during 1-year period • - Different geographic locations • - Some with rising some with declining prices • Baryla, Zumpano, Elder (2000) “An Investigation of Buyer Search in the Residential Real Estate Market under Different Market Conditions” • - Houses purchased in different interest rate periods • - Different geographic locations (entire country) Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 5

6. Idea • Krainer and LeRoy (2002) “Equilibrium Valuation of Illiquid Assets” • - Theoretical general equilibrium model of housing transactions • - Buyers’ valuations of houses are heterogeneous • - Weigh the search cost against the expected life-time utility less price • - Equilibrium: Longer expected stay in a house increases search duration • E. Chernobai (working paper) “When Does Mobility Reduce Liquidity” • - Theoretical model that generalizes Krainer & LeRoy’s • - Short-term and long-term buyers • - Equilibrium: Long-term buyers search longer than short-term buyers Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 6

7. Research Questions Questions of interest: Our hypotheses: 1.) Any effect of expected housing tenure on realized search duration? Positive relationship if buy for consumption • Investors: • Time pressure to buy: Yes? No? • What does a typical consumption- buyer want? • Short-term investors • vs. • Long-term investors 2.) Are consumption-buyers different from investor-buyers? 3.) Any differences in 1.) and 2.) between “hot” and “cold” markets? - Time to buy is shorter in “hot” market - Investors: Rel. proportion of short- & long-term investors varies over time Presented by Ekaterina Chernobai ERES 2011, Eindhoven

8. Results “Hot” market “Cold” market Survey 2004-2005 recent house-buyers Mailed 6,000 questionnaires Response rate: 11.3% (661) Survey 2007-2008 recent house-buyers Mailed 6,200 questionnaires Response rate: 11.6% (719) Presented by Ekaterina Chernobai ERES 2011, Eindhoven

9. Results DESCRIPTIVE STATISTICS (months) Correlation matrix: no issues Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 9

10. Results REGRESSIONRESULTS Dependent variable: logTimeToBuy Weibull distribution consumption incentive Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 10

11. Results • We also looked at Pooled regression model with: • “Hot” dummy interaction terms for all variables  significant for many  Splitting into “hot” and “cold” sub-samples is justified • “Investor” dummy interaction terms for all variables  significant for Tenure variables, Coast, and New To identify consumption- and investment-driven submarkets, split “Hot” and “Cold” samples into - Coastal zip code areas (43% of zip codes, 38% of obs.) - Inland zip code areas Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 11

12. Results REGRESSIONRESULTS Dependent variable: logTimeToBuy Weibull distribution consumption incentive investment incentive - short term - investment incentive - long term - ??? next housing cycle Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 12

13. Results One possible explanation of differences between Coast & Inland results: (means) < < < < > < Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 13

14. Summarize • Consumption-driven purchases: • - “hot” market in coastal areas • - “cold” market in inland areas • Long-horizon investment activity: • - in just the opposite sub-markets • Short-horizon investment activity: • - in inland areas  Investment activity leads consumption activity • The boom & burst of the “sub-prime” bubble affected search duration in Hot & Cold periods Presented by Ekaterina Chernobai ERES 2011, Eindhoven page 14