- A long-distance friend purchasing a home may make a person more likely to buy one and even pay more.
- Harvard and NYU researchers discovered the correlation through social-network and home-sale data.
- One researcher stressed that it’s important to “de-bias” yourself.
During the past two years, home prices rose quickly nearly everywhere. In April, the national median home sale price hit an all-time high of $391,000, according to the National Association of Realtors, and by some estimates, it was the fastest surge in prices in 45 years.
At times, it might’ve felt like everyone decided to buy a house at once. According to economic research, that groupthink is very real and could be risky to your finances.
Researchers from NYU and Harvard, together with Facebook, in 2018 provided a peek into how social relationships drive economic decisions, and, in this case, inflate home prices. They quantified what some people may have already suspected: When friends, even in another state, are buying a house, it will increase your desire to find a new place for yourself. You might make that deal at a higher price, too.
The conclusions remain relevant today, Johannes Stroebel, a professor of finance at New York University and an author of the research paper, said.
Stroebel told Insider that he first grew curious about social-media influence after learning friends in London were seeing record-high home prices. He recalled wondering if he should invest in a new home where he was in Chicago, 4,000 miles away — even though, as a finance expert, he knew the urge was an irrational one.
“As a real economist, I knew that what house prices in London were doing was not very relevant to what house prices in Chicago would likely do going forward,” he told Insider this week.
So he set out with his team to measure how distant friends might make you more bullish on your hometown’s real estate.
Among the first steps, the researchers took a snapshot of all US-based active Facebook users from July 1, 2015, including their age, education, and more. At the time, 68% of the US adult population was on Facebook.
They overlaid that with information from Acxiom InfoBase, a data-services firm, which provided data points like household size, home ownership, and public-deeds records. From there, they zeroed in on residents of Los Angeles County and the far-flung friends of those people.
With their models, the team showed that a long-distance friend experiencing a 5% bump in their local home prices correlated with an individual buying a home faster and being willing to pay more in their market. That individual was likely to buy a 1.6% bigger property, reflecting a confidence boost researchers say is similar to a pay bump.
Stroebel said he was surprised by the magnitude of the effect.
“If you have friends in a part of the US where house prices have recently gone up, you are more optimistic about house-price growth in your own location, even though there is no good rational reason why, say, house-price growth in Chicago should predict future house-price changes in Los Angeles,” he said.
During the past two years, younger millennials became the fastest-growing homebuyer segment, potentially spurred by the idea now was the time to “grow up.”
Trusting friends isn’t inherently a bad financial move, but Stroebel stressed that it’s important to recognize this impulse in order to make the best decision for your household. Whether it’s buying a house, a stock, or bitcoin, it’s important to “de-bias” yourself and recognize that it might be FOMO you’re feeling.
“It’s important to be aware of these patterns of behavior, and to make sure they are not the key drivers of your investment decisions,” he said.