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Home Envy?
In a survey Robert Frank finds that people say they would rather live in a 3000 square foot home when their neighbors have 2,000-square-foot bungalows than live in a 4000 square foot home in a neighborhood of McMansions. Greg Mankiw asks:
Do people really behave as reflected in this survey? I bet the 4,000 square foot house surrounded by McMansions would sell for more than the 3,000 square foot house surrounded by bungalows.
Let's take it to the data. I regressed the sales price of about 12,000 houses in Northern Virginia on a bunch of housing characteristics including number of bathrooms, bedrooms, levels, age of the house and so forth. I also included the average sales price of homes in the same neighborhood. The result? Houses in neighborhoods with high average prices sell for more than similar houses in neighborhoods with lower average prices. Thus the prima facie evidence is that the same house is worth more if it is surrounded by more expensive houses - the opposite of Frank's hypothesis.
Now it could be that the high average price of other homes in the neighborhood is controlling for unobservables of "your" home so here is a more precise test. I defined a variable (sqft-avgsqft) where sqft is the lot size of your house and avgsqft is the neighborhood average. I then split this into a positive difference, when your house is bigger than your average neighbor's house and a negative difference when it is smaller. Bigger houses ought to sell for more everywhere but if Frank is right then square footage is more valuable when other people's square footage is low (lording it over your neighbors). Similarly, if Frank is right people should be especially averse to living in small houses in big neighborhoods thus a negative difference should result in much lower prices.
Below you can find the relevant part of the regression. The bottom line is that houses with bigger lots sell for more (the positive coefficient on lotsqft) but the increase in price is less when your lot size is bigger than the average lot size. In other words, people do not want to own the biggest house in the neighborhood.
What about when your house is smaller than average? Here there is no penalty. Contra Frank, people do not mind having a small house in a neighborhood of McMansions.
| SalesPrice | Coef. | Robust Std. Err. | t | P>t | [95% Conf. | Interval] |
| pos dif | -.4012873 | .0992195 | -4.04 | 0.000 | -.5957739 | -.2068006 |
| neg dif | .0352269 | .0474728 | 0.74 | 0.458 | -.0578278 | .1282815 |
| lotsqft | .760224 | .0527708 | 14.41 | 0.000 | .6567846 | .8636635 |
Although the data are inconsistent with Frank's argument that the rich make the middle class worse off they are consistent with an alternative status effect in which people dislike lording it over their neighbors or in an alternative interpretation, the poor make the rich worse off.
Posted by Alex Tabarrok on August 6, 2007 at 07:23 AM in Economics | Permalink
Comments
Contra Frank's view is the old real estate investor's advice to buy the smallest house on the street, which will offer better returns to rehabbing or expansion.
Perhaps not directly on your point, since the investor probably doesn't much care what the neighbors think. On the other hand, the presence of investors to arbitrage envy-based price differences (if any) might confuse the data.
Posted by: Mike-KP at Aug 6, 2007 7:40:27 AM
Isn't that only a second-order difference? So the poor only makes the rich less better-off?
Posted by: Yan Li at Aug 6, 2007 7:49:18 AM
If I'm interpreting your 'rich' and 'poor' groups correctly, I'd argue that McMansion owners are not rich. In fact, they may be worse off than their bungalow neighbors because of strangulation levels of debt. Certainly they’re more at risk should something happen to any part of the economy.
Additionally, McMansion owners in my neighborhood are mountainously unhappy/tense/hostile, perhaps at the prospect of life-long commitment to a job where they have little if any control and are bound by the choices they’ve made.
No numbers or studies, just experience from living in a rural-turned-prestigious neighborhood.
Posted by: Jane at Aug 6, 2007 8:07:48 AM
A lot here depends on how individuals define their reference groups.
There seems to be evidence that when people are making decisions like the house-buying decision (or migration decisions more generally) they tend to act somewhat myopically, making comparisons primarily with their current neighbours. It's only after they move that they start comparing to their new neighbours (and feeling worse off as a result). This would reconcile Frank's survey results (when the new neighbourhood is artificially made more salient) with the observed price data (when the comparisons with the old neighbourhood dominate), without affecting Frank's underlying point - that status matters.
None of this is to deny of course, that there are benefits to living in richer neighbourhoods, or indeed, that these benefits may outweigh the effects of status comparison. But contra Alex and Mankiw, the price data aren't sufficient to show that.
Posted by: conchis at Aug 6, 2007 8:24:07 AM
Frank's and Alex's data can be reconciled if the smallest house in a big-house neighborhood has lower intrinsic value but higher option value, due to the possibility of upgrading it to a McMansion. As Mike-FP says, those houses are often preferred by real estate investors, who may bid up the price of these houses above their value to people who live in the homes.
An easy test for this would be to repeat Alex's experiment, using property tax data that separates land value from building value, since the option value will be reflected in the land value more than in the building value.
OTH, I would think that living in a rich zip code or a prestigious street would have more signalling value than living in a big house on a poor quality street, because people are more likely to learn your street address than your square footage.
Posted by: DK at Aug 6, 2007 8:45:53 AM
Jane: "Additionally, McMansion owners in my neighborhood are mountainously unhappy/tense/hostile, perhaps at the prospect of life-long commitment to a job where they have little if any control and are bound by the choices they’ve made."
Jane, my suburban Dallas neighborhood of 4,000 sq ft homes is entirely the opposite. Friends and business relations who live in 5,000 sq ft houses nearby are similarly content. Many own their own businesses or have risen to middle level executive positions. They enjoy significant control over their lives.
Not sure where you live, but it's possible that our experiences differ because the cost of housing is different. 4,000 sq ft homes in my suburban town sell for about $330K to $400K. So paying the mortgage is not that big a deal.
Just curious, how did you determine that your neighbors were "mountainously unhappy/tense/hostile"?
My observations are based on conversations with my neighbors at block parties, during community garage sales, and while strolling through the subdivision with my beagle. Maybe you would have less hostile neighbors if you were accompanied by a beagle.
Posted by: John Dewey at Aug 6, 2007 8:58:45 AM
The root of the problem may be Frank using survey data on people's opinions, when data are avaiable on people's behaviour.
As I understand it, economists are usually more interested by what people do rather than what they say.
Talk is cheap, actions speak louder than words.
Posted by: Bruce G Charlton at Aug 6, 2007 9:00:09 AM
Conrol for school quality? Apparently, who your child's classmates are makes a pretty big difference in how they behave.
Posted by: josh at Aug 6, 2007 9:10:46 AM
This is interesting but did you control for proximity to downtown? We are more likely to see heterogeniety in housing size in older neighborhoods close to downtown (compare Arlington to Centerville). Since being close downtown is all-important in determining house value, we might see a spurious correlation between small homes next to larger homes and larger than average home prices.
Posted by: Michael H. at Aug 6, 2007 9:29:32 AM
Hi, I remember doing a similar regression for one neighborhood here in Houston where among the input variables was both lot size and square footage of the house. I don't think you can look at lot size alone. Indeed, developers usually map out a given neighborhood with more-or-less equal lot sizes. The McMansion phenomenon occurs when someone tears down a house in that neighborhood and replaces it with a house with a much larger square footage on the same size lot. This usually means a smaller yard and at least one extra storey on the house. It looks out of proportion with the rest of the houses in the neighborhood--at least until more McMansions are built.
I think a better measure would have been to look at houses with similar lot sizes and then compare square footages of the houses themselves.
Posted by: RWB at Aug 6, 2007 9:39:20 AM
Conchis' point above is critical to the interpretation of the results. A substantial body evidence from behavioral economists indicates that people do behave myopically. For instance, when households migrate to a new region they choose commuting distances similar to those of the regions they depart, and subsequently move to be more like the average commuting distance in their new region.
If households behave myopically, we wouldn't expect Frank's effect to be found in housing prices.
Posted by: KM at Aug 6, 2007 9:46:40 AM
Why does Frank assume that the reason people would prefer the 3000 sq ft house in the neighborhood of 2000 sq ft houses (if that is in fact accurate) is because they want to lord it over their neighbors? My own initial reaction to the question when I first read it was that I'd prefer to live in the neighborhood with smaller houses because there would be less social pressure and less "keep up with the Joneses."
Imputing motives to other people, especially such unlovely ones, is hazardous business.
Posted by: Stuart at Aug 6, 2007 10:03:07 AM
Bruce Charlton is almost certainly correct- pay less attention to what people say, and more attention to what people do.
Posted by: Yancey Ward at Aug 6, 2007 10:03:08 AM
Alex --
How did you sort out the effect of schools and taxes? The small sqf house in the rich neighborhood also probably has the added effect of residing in a good school zone, which increases its value for reasons exogenous to the status effects. Further, rich towns generally have lower tax values, which is capitalized into the housing value. My guess is that your "opposite of Frank" calculation simply determined that good schools and low taxes are capitalized into housing values, something we have known for a long time? (Since henry george?)
Posted by: Huh? at Aug 6, 2007 10:07:17 AM
Stuart,
My hypothesis for why some impute such motives is their desire to justify action to cut the wealthier down to size.
Posted by: Yancey Ward at Aug 6, 2007 10:14:02 AM
Stuart,
"Why does Frank assume that the reason people would prefer the 3000 sq ft house in the neighborhood of 2000 sq ft houses (if that is in fact accurate) is because they want to lord it over their neighbors? My own initial reaction to the question when I first read it was that I'd prefer to live in the neighborhood with smaller houses because there would be less social pressure and less "keep up with the Joneses.
I just started reading Frank's new book last night (where this survey is quoted), and he gives that as one possible motivation for the phenomenon. He says that attributing the pricing of positional goods to jealousy and overt status anxiety makes the whole subject dirty and unappealing for economists to study. The economist should care less whether wants a relatively larger house because of spite or lowering social pressure (that's the sociologists' job?) but should accept the fact that positional goods do exist.
And kudos to Alex for actually testing the phenomenon.
Andrew
Posted by: Andrew at Aug 6, 2007 10:51:32 AM
There's an old saw in real estate that is relevant here: always buy the worst house on the best block rather than the best house on the worst block. Not only is this useful investment advice but in my experience living in the best house on the block (as you say, lording it over the neighbors) is not so great. I had this situation for awhile in LA (priv home on a block of mostly rentals) and there are many unpleasant assymetries. There are good reasons the value of such homes is constrained by their surroundings, which brings us to another old saying: location, location, location.
Posted by: Dan at Aug 6, 2007 10:52:09 AM
Nice post!
Posted by: Daniel Klein at Aug 6, 2007 10:56:44 AM
"Conrol for school quality? Apparently, who your child's classmates are makes a pretty big difference in how they behave."
I was going to point out something similar: it's possible that, although people in the abstract prefer the bigger house surrounded by smaller ones, the smaller house in the big neighborhood might have other things going for it, such as better schools or a safer feel. If you could hold all other factors constant, perhaps people would behave as they told Frank they would, but in the real world this never happens.
Not to say that Alex's hypothesis isn't correct, as it might be, but other issues might also be involved.
Posted by: Jake at Aug 6, 2007 11:18:02 AM
I would like to echo the concern about school quality.
A different test that would be pretty useful:
Comparing the value of small houses as the houses around them become larger. Theoretically, the house that doesn't grow should have its value appreciate more slowly, right?
Posted by: Robert at Aug 6, 2007 11:29:52 AM
The median household income is about $50,000 a year so almost half the people in the survey can not afford to buy a house and few could afford a 6000 square foot house which would probably take 10 times their median income. It has long been know from empirical studies that people prefer neighborhoods with a median income slightly above their own but there is no data about how they value neighborhoods where the median income is greater by a factor of 10 or more. They are not in the market in such neighborhoods any more that they are in the market for $100,000 diamonds or first class airlines tickets. You can believe the survey or not but it is all there is.
Posted by: joan at Aug 6, 2007 12:30:05 PM
Alex, What on earth are you regressing? "I defined a variable (sqft-avgsqft) where sqft is the lot size of your house and avgsqft is the neighborhood average. I then split this into a positive difference, when your house is bigger than your average neighbor's house and a negative difference when it is smaller." You start off talking about LOT size and proceed immediately to talk about HOUSE size. Frank's point is about house size, which always accounts for most of the property value. What are you doing here?
Posted by: Mark at Aug 6, 2007 12:34:55 PM
If it were school quality we would expect that small houses in neigborhoods with big homes would sell for more than expected. That is not what we are finding.
Note also that I control for zip code.
Alex
Posted by: Alex Tabarrok at Aug 6, 2007 1:09:19 PM
Wasn't this a survey of "wants"? In other words, "if you could have this" type of scenario. Class envy is a staple of the American dream - most people in this country want more of what the neighbor has. I find the results of his survey quite accurate. JOAN is correct in that one cannot disprove the results of the survey that is based on "what could be, if...".
The average American has every basic human need satisfied - the easier it gets to meet those needs the more one looks to fulfill wants. Frank's survey reveals a disturbing trend in America - the tendency to look to government to fulfill wants at the expense of others through confiscatory taxes. How Frank thinks it's necessary to tax the wealthy so I can give each member of my family 1000 sq. feet of space is beyond my comprehension. The green-eyed monster destroys...
Posted by: Mike at Aug 6, 2007 1:11:33 PM
Controlling for zip code should effectively eliminate the proximity to downtown effect and the school district effect. However, I would recommend as a test that you run separate regressions in each zip code just to verify that your model is robust to regional effects. If you get basically the same results in each zip code then your model is probably fine. If the coefficients are radically different from zip code to zip code then something is misspecified.
Posted by: Michael H. at Aug 6, 2007 2:06:55 PM
Pricing data cannot refute opinion data because it isn't relevant. That fewer richer people are willing to pay more for homes in more expensive neighborhoods says nothing about what less wealthy people want in their neighborhoods. If this was just a question of which house will sell for more then they would just choose the more expensive house and sell it if they wished to live elsewhere, but they assume you are asking about where they want to live, not about which is worth more or what they are willing to pay.
Posted by: Lord at Aug 6, 2007 5:00:11 PM
The effect noted by Frank is well known in the psychology literature since the 70's. People have cognitive biases associated with groups and form group associations very easily. Tajfel showed people would exhibit this behavior when assigned to groups that they know are assigned at random (i.e. coin flips), and it is much stronger when there is a reason such as ethnicity or religious beliefs. I think that all the survey shows is that people don't like their neighbors and don't consider them part of their "in-group".
Posted by: mz at Aug 6, 2007 5:38:57 PM
Dear Alex
the research is great.
May I ask you thought to email me a few raw numbers - I want to run my own stats.
simple:
-sqft
- avesqft
- price fo sqft
- price for avesqft
also - i am sure you have a table:
list of sqft and prices in area 1 and in area 2
list of sqft in the areas 1 and 2 which are not on sale
sincerely,
Max
Posted by: max at Aug 6, 2007 6:36:11 PM
John Dewey of Dallas:
I believe your experience is a Texan cultural influence, where southern manners enjoy a priority over in-your-face truth. I have a degree from UT-Austin and now live in the northeast.
The amount of debt vs. income for McMansion owners vs. bungalow owners would be thoroughly interesting to see. Maybe by region and for the whole country.
My comments were based on my own experience, and the way I know my neighbors are tense and overwhelmed is by the increase in hostile driving, and screaming emanating from several houses following the rural-to-prestigious development.
Also, there's another McMansion development not far away containing inhabitants with which others I've talked with have had horrendous experiences. It's a pattern. Also, these houses sell for >1 million.
Posted by: Jane2 at Aug 6, 2007 7:22:43 PM
I remember reading something in a related vein, but the point was very different. The idea was related more to people's inaccuracy in predicting what would make them happy. The argument was that, in general, people believe they would be happier owning a house in a "better" neighbourhood even if the house is relatively small. This belief may drive the prices of there houses higher relative to similar houses in poorer neighbourhoods. The reality is that the people are likely to be happier in a better house relatively independently of the neighbourhood. Some realization of this in buyers may be a partial explanation of why the smaller houses in better neighbourhoods show more limited appreciation.
Posted by: iam at Aug 7, 2007 3:26:21 AM
jane2: "I believe your experience is a Texan cultural influence, where southern manners enjoy a priority over in-your-face truth."
Jane, I think the southern manners explanation is somewhat of a caricature. In the first place, I've also lived in Philadelphia, St. Louis, and Sacramento. I worked one summer on Wall Street in New York. People are pretty much the same everywhere.
New York folks seemed a bit more rushed when commuting. But in the workplace and in social settings they were very nice, decent people. I'd hardly describe them as tense.
Folks on my block in my Dallas suburb moved here directly from California, from New York, from Michigan, and from Kansas as well as from other parts of the South. There is very little difference in their manners or civility.
Posted by: John Dewey at Aug 7, 2007 7:00:00 AM
The idea that 2000 sq.ft home is a bungalow says a lot about the discussion. That notion adds to the angst of those who "feel" left out.
Posted by: Mike at Aug 7, 2007 9:41:59 AM
The idea that 2000 sq.ft home is a bungalow says a lot about the discussion. That notion adds to the angst of those who "feel" left out. Maybe Frank could use the tax increase to subsidize therapy sessions for those who covet thy neighbor's Mcmansion.
Posted by: Mike at Aug 7, 2007 9:47:00 AM
Hi John,
I heartily disagree that, "People are...much the same everywhere".
That description denies culture and heredity in a single sentence.
Posted by: Jane2 at Aug 7, 2007 5:49:04 PM
