'I'll Have What She's Having': Identifying Social Influence in Household Mortgage Decisions

Abstract

We find evidence that neighbors apply an important economic force on households’ mortgage choices. We use household mortgage data, precisely geolocated real estate data, and a recently developed research design to identify the existence of social influence effects in three important household mortgage choices. We test for social influence by estimating the effect of hyperlocal block peers (i.e., neighbors living on the same block) over and above the effect of neighborhood peers (i.e., neighbors living on the same or adjacent blocks). Assuming that households can choose in which neighborhood to live but not on which specific block, block peers, conditional on neighborhood peers, are as if randomly assigned. We find that households are 2% to 5% more likely to choose a particular lender, 1.5% more likely to choose an adjustable rate mortgage (ARM), and 9.8% more likely to refinance if the share of their block-neighbors with that lender, with an ARM, or who have recently refinanced increases by ten percentage points, respectively. To provide further evidence for our hypothesis, we apply our research design to two groups: households moving to new neighborhoods and households who own but do not occupy second and third homes. We find that movers are not initially affected by their hyperlocal peers, but become so over time. Non-occupant owners' decisions about their second and third properties are never influenced by the households that live around the property but are influenced by the neighbors at their primary residence, even when their primary residence is miles away from their second or third home. Finally, we complement these empirical strategies in the lab by experimentally assigning peers and peer decisions in a variety of ways. We conclude that hyperlocal peers have an economically significant impact on how households make their own mortgage decisions.