THREE ESSAYS ON SELLERS’ BEHAVIOR IN THE HOUSING MARKET SVETOSLAVA ALEXANDROVA Bachelor of Business Administration Cleveland State University May 2003 Master of Business Administration Cleveland State University May 2007 Submitted in partial fulfillment of requirements for the degree DOCTOR OF BUSINESS ADMINISTRATION at the CLEVELAND STATE UNIVERSITY MAY 2017 ©COPYRIGHT BY SVETOSLAVA ALEXANDROVA 2016 We hereby approve this dissertation for Svetoslava Alexandrova Candidate for the Doctor of Business Administration degree for the Department of Finance And CLEVELAND STATE UNIVERTSITY College of Graduate Studies by ___________________________________________ Committee Chair, Dr. Alan Reichert Department of Finance/October 6th, 2015 ___________________________________________ Committee Co-Chair, Dr. Haigang Zhou Department of Finance/October 6th, 2015 ___________________________________________ Prof. Dr. Dieter Gramlich Baden-Wuerttemberg Cooperative University/October 6th, 2016 ___________________________________________ Dr. Walter Rom Department of Operations and Supply Chain Management/October 6th, 2015 October 6th, 2015 ___________________________________________ Date of Defense THREE ESSAYS ON SELLERS’ BEHAVIOR IN THE HOUSING MARKET SVETOSLAVA ALEXANDROVA ABSTRACT Housing markets exhibit some puzzling behavior that cannot be completely explained by rational market dynamics. The neoclassical economic theory posits that rational sellers and rational buyers in the housing market will look at the current market price in order to determine a value of a property. Studies, however, show that physiological biases may affect the decision- making process of both sellers and buyers. I examine the behavior of sellers in the housing market in three different settings. In essay 1, I analyze the effects of the health of the housing market on mobility. In Essay 2, I study the effects of sellers’ loss aversion on listing price and time on the market within the prospect theory framework. In Essay 3, I focus on identifying stress in the housing market by developing a stress index and commencing the design of an Early Warning System that incorporates signals from the market and behaviors from sellers to indicate increasing levels of pressure. I utilize a data set of private home sale transactions of corporate relocations for the period 2004-2014. The results of the first study from the stepwise logit models on series of economic variables and demographic factors show that relocating employees facing negative equity situations and equity less than 5% of home value have a greater chance of rejecting relocation while iv economic factors like affordability and credit availability have a positive effect on their ability to move. Essay 2 results indicate that a seller who faces a loss will set up an asking price 5.69 percent higher than they would otherwise. Additionally, sellers facing a loss will experience a reduction in the hazard rate of sale resulting in longer time on the market while income and family status have effect on loss aversion and time on market. In the last essay, I hypothesize that economic signals and home sellers’ behaviors can explain the variability of the housing market stress index proxied by a transformed S&P500/Case Shiller Index. The preliminary results of the autoregressive models find that housing variables and market expectations of the “informed sellers” have statistically significant explanatory power. v ESSAY 1: HOUSING FACTORS AFFECTING MOBILITY: THE IMPACT ON CORPORATE TRANSFERS vi HOUSING FACTORS AFFECTING MOBILITY: THE IMPACT ON CORPORATE TRANSFERS SVETOSLAVA ALEXANDROVA ABSTRACT Using private home sale transactional data of U.S. domestic homeowners' relocation moves from 2004 to 2014, this study examines the effects of the housing market on mobility and more specifically corporate transfers. There are various factors that drive the willingness of an employee to accept a relocation transfer that can be categorized in three main groups - career, family and economic determinants. I hypothesize that the recent woes of the housing market have significantly affected the ability of relocating employees to accept corporate relocation offers to move to a new location. More specifically, the declining housing prices and the eroding house equity have increased the frequency of relocating homeowners facing negative equity and loss on sale situations. The increased burden of those financial constraints results in diminishing ability of employees to accept offers to relocate. This study contributes to the mobility research by directly examining the link between accepting or rejecting a corporate transfer and the ability of the relocating employee to dispose of his or her residence in the old location. The stepwise logit regression results show that relocating employees facing negative equity situations and equity less than 5% of home value have a greater chance of rejecting a relocation transfer decreasing their mobility. Housing market health and level of affordability also have a vii significant effect on the ability of employees to relocate. Additionally, the homesale programs offered by the employer as part of the relocation package also play a role in the willingness of employees to relocate. Additionally, our results show that certain demographic factors such as gender and family status also impact the decision to move to a new location. Lastly, I examine three categories of destination factors and determine that education and certain types of crimes affect the decision to move. viii TABLE OF CONTENTS PAGE ABSTRACT………………………………………………………………………...vii LIST OF TABLES…………………………………………………………………..xi LIST OF FIGURES…………………………………………………………………xii CHAPTER I. INTRODUCTION………………………………………………………....1 II. MIGRATION AND MOBILITY………………………………………….6 III. CORPORATE RELOCATION OVERVIEW……………………………..9 3.1 Corporate Relocation Process………………………………………….9 3.2 Relocation HomeSale Process………………………………….........11 3.2.1 Overview of the Relocation HomeSale Process…………….....12 3.2.2 Home Marketing Process...……………………………………15 3.2.3 Relocation Appraisal.………………………………………….17 3.2.4 Tax Implication of HomeSale Process.………………………..18 IV. LITERATURE REVIEW.…………………………………………………20 V. MODEL AND HYPOTHESES.…………………………………………..23 5.1 Theoretical Model….………………………………………………….23 5.2 Hypotheses……………….…………………………………………....24 5.3 Methodology………………………………………………………….25 VI. EMPIRICAL MODELS AND VARIABLES…………………………….26 6.1 Factors Affecting the Decision to Relocate…………………………...26 6.1.1 Personal and Family Factors………………………………….26 6.1.2 Economic Factors……………………………………………..27 ix 6.1.3 Compensation and Career Opportunities…………………..…28 6.1.4 Destination Location Factors…………………………………28 6.1.5 Housing Market Factors………………………………………28 6.2 Empirical Models and Variable Discussion…………………………..29 6.2.1 Empirical Models……………………………………………..29 6.2.2 Dependent Variable…………………………………………...33 6.2.3 Independent Variables………………………………………...33 VII. DATA AND SAMPLING PROCESS…………………………………….38 VIII. EMPIRICAL RESULTS…………………………………………………..46 8.1 Descriptive Statistics…………………………………………………..46 8.2 Empirical Results……………………………………………………...48 8.3 Destination factors impact on willingness to relocate………………...55 IX. CONCLUSION……………………………………………………………62 BIBLIOGRAPHY…………………………………………………………………64 APPENDIX………………………………………………………………………..67 A. Tax Concepts in Relocation – Eleven Key Elements and Procedures of an Amended Value x LIST OF TABLES Table Page Table I. Variable Legend ..................................................................................................31 Table II. Percentage of Rejected Transfers per State .........................................................42 Table III. Sample Size and % of Independent Variables to Rejected and Accepted Transfers ............................................................................................................................44 Table IV. Sample Size and % of Demographic Variables .................................................45 Table V. Summary Statistics..............................................................................................46 Table VI. Summary Statistics – Expanded Model .............................................................46 Table VII. Correlation Matrix ............................................................................................47 Table VIII. Empirical Results Model 1..............................................................................48 Table IX. Empirical Results Model 2 ................................................................................50 Table X. Empirical Results Model 2- Robustness Check ..................................................52 Table XI. Empirical Results Model 3 ................................................................................53 Table XII. Empirical Results Model 4 ...............................................................................54 Table XIII. Summary Statistics - Model 5 …………..…………………………………..57 Table XIV. Correlation Model..…………..……………………………………………..59 Table XV. Empirical Results Model 5…………..……………………………………..59 xi LIST OF FIGURES Figure Page Figure 1. Reluctance to Relocate .........................................................................................3 Figure 2. Types of HomeSale Transactions .......................................................................15 Figure 3. Reasons for Moving ...........................................................................................41 Figure 4. HomeSale Transactions by State