Identifying Behavioral Explanations for a Subset of the Real Estate Shadow Market

Abstract

This study examines both financial and behavioral explanations for the existence of a residential real estate shadow market for underwater investment properties. We find that the affordability constraint explains only 44.4% of the reasons not to list a property for sale. Three documented behavioral reasons primarily drive the remaining decisions. While various investor demographic characteristics are at times significant, no distinct profile emerged to identify those most likely to reside in this portion of the shadow market.

Keywords: shadow market, familiarity bias, false reference points, status quo deviation aversion, behavioral real estate