Research

We document that the recent house price experiences within an individual’s social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new and scalable methodology to document large effects of perceptions about the attractiveness of property investments on individual and aggregate housing market outcomes. This methodology exploits plausibly-exogenous variation in the recent house price experiences of individuals’ geographically-distant friends as shifters of those individuals’ local housing market perceptions. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, and (iii) pay 3.3 percent more for a given house. Similarly, when homeowners’ friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. A lower dispersion of friends’ house price experiences has a similarly positive effect on housing market investments as higher average experiences. We also find that, at the county level, the across-population mean and dispersion of friends’ house price experiences affect aggregate house prices and trading volume.