Home Bias and the Real Estate Prices

Abstract

This paper argues that the Home Bias phenomenon prevails in the real estate market, which is inferred from psychology, economic, and financial literature. Utilizing the trait of the Home bias behavior, which can reduce the risk of information asymmetry, I modify the classical pure trading model and employ the parameter of relative risk aversion as the proxy variable of Home Bias to translate the relationship among Home Bias phenomenon, the property prices, and the expected returns.
The comparative static analyses indicate that Home Bias behavior is negatively related to the property prices and positively related to the property returns. The marginal effects on property prices are heightened in situations of high time preference and relative low Home Bias. Conversely, the marginal effects on property returns are larger if the time preference parameter is smaller. As a household buyer with high time preference is located far away from a property, his bargaining power is easily affected by home bias behavior. Further, this paper focuses on the home bias elasticity of property prices and returns for the sake of unit-free property. Inelastic coefficients of elasticity of prices and returns indicate that the capability of households to lower property overvalued prices (i.e. increase investment returns) from reducing information asymmetry by using Home Bias behavior is still limited.