Reference Points Spillovers: Micro-Level Evidence from Real Estate.

This article investigates how homeowners’ historically established reference points—specifically, the ZIP code-level housing price index at the time of their original purchase—influence not only their own property sale prices and rents but also those of neighboring properties through competitive spillovers. Using extensive data on single-family home sales and rentals in California, the study finds that spillover effects from neighbors’ reference points amount to roughly half the magnitude of the direct own-reference point effect, and these effects persist even after controlling for house quality, location, and renovations. A theoretical model of imperfect Bertrand competition among sellers supports the empirical findings, predicting that spillovers diminish with increased competition and affect both prices and sales probabilities. At the aggregate ZIP code level, these direct and spillover reference point effects generate significant variation in prices and rents, accounting for up to one-third of local pricing wedges, highlighting the role of market power and competition in propagating behavioral biases in real estate markets.