Social Networks vs. Local Expertise: A New Challenge for Brokerages

The opinions and experiences of friends and acquaintances have always shaped the way people think about buying, owning and selling homes. New research suggests that the social networks that influence attitudes towards real estate decision making today are more likely to be national, not local, and the consequences could be serious. Thus, consumers are making critical decisions about buying, selling, owning or renting in part based not on conditions in the markets where they live, but on the experiences of friends who may live across the continent.

The new way people think about real estate presents real challenges to real estate professionals. Real estate markets are more localized than ever. Conditions can vary greatly from one metro to another, or even within a metropolitan area for a variety of reasons, including local employment, transportation infrastructure, aftershocks of the housing crash and demographic factors like concentrations of aging Boomers or Millennials who are coming of age. Buyers and sellers must work closely with professionals who are an expert on local real estate markets and have access to the very best microlocal data. Otherwise, they risk making bad decisions that could last a lifetime.

A new study published by the National Bureau of Economic Research analyzed a Facebook survey of users in Los Angeles County and found that individuals whose friends experienced larger recent house price increases considered local property a more attractive investment. The researchers analyzed the relationships between the home price experiences of a person's friends and four housing decisions: whether to rent or own, the square footage of properties bought, the price paid for a particular house, and the leverage chosen to finance the purchase.

The researchers found that a 5 percentage point larger house price increase over the previous 24 months in the communities where an individual's social network friends lived raised that individual's likelihood of moving from renting to owning by 3.1 percentage points during the following 24 months. These price increases were associated with a 1.7 percent increase in the average size of the home purchased, a 3.3 percent increase in the amount paid for the house, and a 7 percent larger down payment.

Conversely, when someone's social network friends experienced less positive house price changes no matter where they lived, those individuals were more likely to become renters and more likely to sell their property at lower prices.

The researchers concluded that their findings "can contribute to our understanding of the geographic contagion of house price shocks." Their results may also have huge significance for the role that brokers and agents play in educating a consumer population that is becoming less sensitive to the diverse conditions between local and hyper local real estate markets.

To view the original article, visit the WAV Group blog.