Keeping Track of the Joneses
By Kate Campbell
Wharton's Christopher Mayer Maps What Makes the
Ever-Unpredictable Real Estate Market Tick
While many real estate markets across the country are hearty, signs of a decline dot the horizon in
places like Manhattan and San Jose, which were among the hottest markets only a few years ago, says
Wharton real estate professor Christopher Mayer. The reasons for such complex fluctuations in the market
vary, he says, but that does not mean they can't be researched, defined and ultimately charted for a more
productive industry. And inefficient markets, he says, often present the best investment opportunities.
"When we're experiencing a boom market, it can make
sense to price aggressively," says Mayer, who along with
colleague David Genesove co-authored "Loss Aversion and
Seller Behavior: Evidence from the Housing Market" for
an upcoming issue of the Quarterly Journal of Economics.
"Even if your house stays on the market a little longer. After
all, the goal is not necessarily to sell to the first buyer who
shows up, but to the buyer who is willing to pay the most.
And if you sell before many buyers have had the chance to
see your house, you are missing out on potentially high bids."
Mayer was an MIT doctoral student in economics in
search of a dissertation topic when he stumbled on his true
calling. While living in a cramped apartment in Cambridge,
Mass. in 1990, Mayer and his wife, Melissa Bilski, began
house hunting for their first home.
He recalls being stunned as he learned more about how
housing markets work. While there were plenty of houses for
sale in 1990, many appeared to be overpriced. The economy
was floundering, but sellers were not getting the message:
asking prices weren't falling, despite slack demand. In addition,
there was almost no information to help buyers make
the daunting task easier.
"My wife and I were about to make the single largest
investment of our lives and I wanted to know more about
what I was getting into. Was this going to be a good or a bad
price to pay?" says Mayer
The experience made Mayer curious about how people
think about their homes as an investment, when they decide
to sell or buy, and what factors they consider before making
these decisions. He discovered that, unlike the stock market,
the real estate market operates in a bit of a vacuum, with
only outdated, often inaccessible or unexamined data to
provide clues.
"Even today, with the expansion of information available
on the web, investors can find out far more about the
right price on a $20 stock than they can know in buying a
$500,000 house. I felt like most people had fundamentally
little idea of what they were doing."
In the end, Mayer wrote his dissertation on real estate
auctions.
"I was interested in how the auction functioned in getting
buyers and sellers together in a room to agree on prices.
It was during a time when I was trying to understand the
behavior of the real estate market. Watching the market
collapse in Boston, I saw properties sell really cheap at these
auctions. But I didn't have any money so I tried to convince
my dad to invest with me. He wasn't ready."
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