The Impact of Gains and Losses on Homeowner Decisions∗

Using unique data on condominium transactions that allow for accurately-measured capital gains and losses, we examine the impact of these gains and losses on homeowner decisions. Consistent with the disposition effect, owners with a gain have higher sell propensities than those with a loss. Since real estate prices result from owner negotiations with buyers and tenants, we also examine whether prices vary across otherwise comparable units depending on the owner’s capital gain. Owners with a gain accept lower selling prices, list for sale at lower prices, and accept lower rents from tenants. These pricing implications are sensitive to the magnitude of an owner’s gain, which is consistent with realization utility, and are economically large. For example, units with a capital gain have selling prices that are 5% lower than those with a capital loss. Overall, our findings indicate that realization utility influences homeowner decisions. Alternative explanations such as financing constraints, informed trading, and mean reversion cannot explain our results.