Market Information Asymmetry among Buyers and Residential Real Estate Prices

Document Type


Publication Date

Fall 2009


For most people, participation in a real estate transaction is a rare event. This relative lack of market experience does not facilitate acquisition of market knowledge which, in turn, means these individuals likely operate in residential real estate markets at a significant informational disadvantage compared to individuals who routinely transact for investment purposes. The economic principle of substitution, sometimes referred to as the law of one price, suggests that identical assets should sell at identical prices, but the informational asymmetry that exists between professional investors and non-investors in residential real property markets presents the possibility that the law may not always apply in these markets. The purpose of the present study is to empirically test whether investors use their informational advantage to systematically pay less for single-family houses than people whose market experience is generally limited to an occasional home purchase or sale. Regression analysis s used for this purpose. In real estate research this technique is referred to as hedonic regression. This well established technique provides a means to determine the monetary contribution of a variety of property attributes towards the selling price of residential property. Previous research has demonstrated that a property’s value depends in part on specific physical features of the property itself such as its’ age, size, upkeep, and benefits that accrue to property owners due to the property’s location. In the present study an additional variable is added to a standard hedonic model to capture any price effect attributable to the classification of the purchaser. Data from 24,790 transactions that occurred in the City of Dayton, Ohio from 2001 through 2007 were analyzed. The results indicate that investors paid, on average, $2,657.93 less than buyers who used the property as their principal residence. For the mean priced house in our study, this means investors paid 4.75% less. The data was also analyzed in annual increments with results similar to the entire study period. The results have important implications for anyone concerned with real property valuation including independent fee appraisers and property tax authorities. The remainder of the paper is organized as follows. In the next section, a brief literature review is presented. The data and methodology are presented in the third section and the results are contained in the fourth section. The paper concludes with a summary.