The Stench of Failure: How Perception Affects House Prices

Kristle Cortes, Mandeep Singh, David H. Solomon and Philip Strahan

No 30760, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In Australian real estate markets, about a third of properties are sold at auction. We show that properties that fail auctions sell later for a 2.6% discount. This effect increases for properties failing multiple auctions and when no bids are made. Consistent with a causal channel, the effect holds when auction failure is instrumented by the tendency of owners to anchor on nearby better properties (and thus set reserve prices too high). Prices cluster just below salient round numbers, and the discount fades over time, inconsistent with our effects reflecting unobserved property characteristics. We test for several mechanisms and conclude that most of the pricing discounts reflect stigma, which reduces potential buyers’ willingness to pay.

JEL-codes: G40 R3 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-dcm, nep-env and nep-ure
Note: AP
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