Current Research

Strategic Mortgage Default in the Context of a Social Network

The real estate market is currently experiencing the worst crisis since the Great Depression. Unemployment has caused people to involuntarily default on their mortgages, while falling home prices have encouraged others to voluntarily stop paying their mortgages. Whether by choice or necessity, as foreclosures increase, they have an increasingly negative impact on the price of the healthy homes around them. One default does little to negatively impact the price of surrounding homes. However, as more and more mortgages in the neighborhood go into default, the negative impact is felt at an increasing rate. Much the same way as a disease spreads throughout a population, so too do falling home prices.

Based on studies demonstrating that the strategic default decision goes beyond purely economic considerations, we build into our Agent Based Model a social network component to incorporate the burgeoning sentiment that it is acceptable, even economically advisable, to strategically default on a mortgage obligation. It is becoming increasingly clear that individual decision-making cannot be understood without exploring the influence of the social groups to which the individual belongs. As fundamentally social animals, humans consciously (and subconsciously) look to their peers when forming opinions, habits, and behaviors. By studying these processes of social interactions quantitatively and modeling these highly interdependent influences, we can achieve a much more complete understanding of decision-making, even for seemingly very individual, independent decisions such as the decision to strategically default.

Accordingly, we theorize that the advocacy of strategic default can be likened to a disease, and measure how quickly this disease can spread throughout a society. The model shows that real estate experts can greatly impact mortgage markets through their use of behavioral advocacy. In fragile markets, advice by influential Mavens can result in a flood of strategic defaults causing a contagious downward spiral of home prices and potentially an eventual market collapse.

Overall, disposition time is the most important variable on which to focus to prevent a housing market collapse, while SNI is the most critical component from an epidemiological standpoint. A reduction in foreclosure disposition time is best handled by policymakers who can streamline the legal arena surrounding the foreclosure process and get real estate owned (REO) homes out of the banks’ hands and back into the legal possession of a healthy buyer. Concerning SNI, existing government programs such as the National Foreclosure Mitigation Counseling program and HUD-sponsored programs should incorporate into their existing programs efforts to educate and dissuade homeowners from choosing the strategic default option.

 

Can Real Estate Agents Influence Homebuyer Property Perceptions Through Their Appearance and Hyperbolic Rhetoric?

This study takes 1,594 potential homebuyers on a Web-based audio/visual tour of a typically priced home in their area. Using voice altering software as well as before and after extreme make-over photos, we are able to isolate the effect of real estate agent characteristics (attractiveness, gender, and hyperbolic rhetoric) on their ability to change the opinions of potential homebuyers. We find that attractive female agents who employ hyperbolic rhetoric are significantly able to alter the impression of the property in the minds of respondents primarily through establishing source credibility (trust). The rooms most influenced by the effective agent are the first (curb appeal) and last (back yard/view) impressions of the home.

 

Mimetic Herding

The theory of Mimetics can be described as a biological predisposition to learn through the emulation of observed behavior. Babies mimic the facial expressions of adults long before they understand the intricacies of the emotions those facial expressions convey. This type of social learning through imitation is one of the earliest forms of learning and never leaves us, even as adults. Since mimetic behavior is conducted on a sub-conscious level, people are unaware, and often do not believe, they can be readily influenced by simply observing the behavior of others.

In the mortgage markets, an economic default describes a situation when a homeowner defaults on his mortgage due to an inability to make monthly payments, whereas a strategic default is said to occur when a homeowner makes the conscious choice to default on his mortgage when he is fully capable of making his monthly payments. The recently observed increase in strategic defaults is a major contributor to the foreclosure epidemic and resulting stalled economy. We liken the increased willingness to strategically default to a disease that can spread throughout the market potentially causing irrevocable damage to the economy. Accordingly, we investigate how individuals mimetically herd following the observed behavior of their peers as it relates to the decision to strategically default on one’s mortgage. This is an important first step in the investigation of the spread of a contagion over a social network and how it might be stopped.

We find that homeowners are easily persuaded to follow the herd and adopt a strategic default proclivity consistent with that of their peers. Herding behavior is stronger when a maven, or thought leader, is involved and weaker when the person finds strategic default to be morally objectionable. Homeowners appear to herd more for informational gains rather than for social reasons. In a robustness check using a sample of real estate professionals, the strong mimetic herding result continues to hold.

 

Toward an Understanding of Real Estate Homebuyer Internet Search Behavior: An Application of Ocular Tracking Technology

We track and record five measures of eye movements of current homebuyers who are in the process of searching for homes on the Internet. Total dwell time (how long a person looks at the photo), fixation duration (how long a person spends at each focal point), and saccade amplitude (the average distance between focal points) are all found to significantly explain a buyer’s overall opinion of the home and its value. A secondary finding is that the sections of the Webpage that are viewed first are the photo of the home, the quantitative description section, distantly followed by the real estate agent remarks section. Finally, charm pricing, the marketing technique where agents list properties at slightly less than round numbers, works in opposition to its intended effect. Given our result that homebuyers dwell significantly longer on the first home they see, and since charm pricing typically causes a property to appear towards the end of a search when sorted by price from low to high, we question the wisdom of using a charm pricing strategy.

 

Ocular Tracking and the Behavioral Effects of Negative Externalities on Market Prices and Opinion

We use ocular tracking technology (dwell time, fixation duration, and saccade amplitude) to follow the eye movements of perspective homebuyers and a convenience sample of student participants while searching for homes on the Internet. We superimpose ominous power lines in matched samples to just one home of the 10 homes that participants tour. Walls of another home within the tour package are artificially painted pink. Again using matched samples to compare results, we find that people rationally differentiate between negative externalities that can easily be changed versus those that cannot. The mere presence of these externalities is not the indicator of value and opinion changes of the property, but rather percentage dwell time and whether the person mentioned them that are significant predictors.

 

Forward and Falsely Induced Reverse Information Cascades

We empirically test for the existence of forward and falsely induced reverse information cascades in an experimental setting using real-time feedback to participants. We demonstrate that cascading occurs in both the forward and backwards cascade settings. On average, as few as three and as many as five steps are all that is needed for participants to begin to be influenced by the group’s information set.

In an examination of who is most likely to participate in the cascade, we find weak evidence that it is those individuals who score high on the Bearden, Netemeyer, and Teel (1989) Susceptibility to Normative Influence (SNI) scale. Concerning the rate of the spread of the cascade in a real world setting, we present preliminary findings that suggest market mavens are somewhat correlated with social connectors. If this is the case, the rate of spread in this more technologically driven modern society should be more rapid.

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