- The National Bureau of Economic Research released "Social Networks and Housing Markets," a new study that analyzed how friends within a social network (Facebook) impact real estate purchasing decisions.
- The study found that social networks do indeed have an influence. For example, individuals with friends who experienced a 5-percentage-point home price increase over the previous 24 months are more likely to transition from renting to owning.
- The impact goes beyond the micro level and can cause house price shocks throughout the country.
Social media has a profound impact on how we make our everyday decisions — which detergent we’ll use to wash our clothes, the car we’ll purchase next or even what doctor we’ll choose for ourselves and our families.
But how does social media influence one of the biggest decisions someone will make in a lifetime?
Researchers Michael Bailey, Ruiqing Cao, Theresa Kuchler and Johannes Stroebel dug into this question in their National Bureau of Economic Research study “Social Networks and Housing Markets.”
The team observed the Facebook friendship networks of individuals in the U.S. and Canada and analyzed 1,242 responses for a housing market survey among Los Angeles-based Facebook users.
The survey asked respondents to provide information on how often they talk to friends about real estate investments and to rate the attractiveness of real estate investments in their ZIP code compared to other investments.
The researchers found a strong correlation “between the recent house price movements in counties where a respondent has friends, and whether that respondent believes that local property is a good investment.”
To solidify their findings, the team decided to examine how friends outside of the Los Angeles area impacted users’ purchasing decisions.
The researchers gathered and combed through the social network data of all 1.4 million Los Angeles-based Facebook users and 525,000 housing transactions.
They also analyzed the effects of the house price experiences in an individual’s social network based on extensive margin decision (renting versus owning), the intensive margin decision (the size of properties bought), the willingness to pay for a particular property and the leverage chosen to finance the purchase.
The results showed that the correlation doesn’t weaken, and “that house price experiences within an individual’s social network have quantitatively large effects on all four aspects of his or her housing investment decision.”
What researchers learned about the Facebook effect
The results were broken down into four key findings. Individuals with social media friends who experienced a 5-percentage-point increase in home price over the previous 24 months were:
- More likely (by 3.1 percentage points) to transition from renting to owning over a two-year period
- Buying 1.7 percent larger homes
- Paying 3.3 percent more for a given house
- Making 7 percent larger down payments
Conversely, if an individual’s friends experience negative (or less positive) price changes, they are more likely to become renters and sell their property at a lower price.
Social network homebuying shockwave
The researchers said the results can’t be explained through the “keeping up with the Joneses” lens that is so commonly seen in our consumer-driven culture.
The study shows the key findings persist even when they controlled for the level and change in trading volume within a person’s social network. Furthermore, the results are the same when they focused on the house price experiences of the subset of friends who are verified renters.
The researchers concluded that social networks do indeed influence individuals’ real estate purchasing decisions. And moreover, these influences often reach beyond the individual level to impact house price shocks throughout the country.
Want to read the full study? Request your copy here.