This study examines the determinants of herding in the U.S. housing market with the focus on the effect of psychological biases on herding. People are motivated to copy others due to a psychological need for social behaviour. If homebuyers see large local inequalities in homeownership, they will have a stronger desire to overconsume relative to areas with more equal housing distribution. This mimetic behaviour will therefore lead to higher levels of herding, with resultant poor economic outcomes. Therefore, we test if areas with more extreme distributions of housing, income and consumption (i.e. areas where people have greater degree of positional concern) will exhibit more extreme herding, while controlling for fundamental economic and housing market variables.

The development of behavioural finance in the 1970s (Kahneman and Tversky 1979) and then its crossover into asset markets shortly after (Shiller 1982) has allowed behavioural factors in real estate to enjoy a growing research interest. It has been shown that an appreciation of sociological and psychological factors provides an understanding of market dynamics beyond the conventional efficient markets approach (West 1988, Lux 1995).

Herding is defined when behaviour is correlated across individuals (Devenow and Welch 1996), especially where it leads to sub-optimal investment decisions and bubble formation. Herding can be rational if informational inefficiency and agency issues lead investors to copy others (Bikhchandani, Hirshleifer et al. 1998), or irrational when they are susceptible to psychological biases (Devenow and Welch 1996).

One motivator for the presence of these psychological biases is the established economic presence of positional goods, whose value is derived from their social status and where the value is based on relative, rather than absolute, distribution. The overconsumption of positional goods creates negative externalities which have wider economic repercussions (Frank 2005). It has been shown that excessive social positional concerns lead to poor outcomes in physical and mental health (Frank 2008), and also sub-optimal investment decisions, such that people over-consume and over-leverage.

Evidence for the presence of herding in institutional investors is mixed (Barber, Odean et al. 2009), and the research in direct residential markets is limited, however the latter has found some significant results (Hott 2012, Ngene, Sohn et al. 2017). The existing evidence suggests that higher levels of herding can lead to bubble formation, and the resulting welfare loss can be extensive (Deng, Hung et al. 2018), as most clearly seen in the fallout from the Global Financial Crisis.Considering the scale of residential property as an asset class (over $33 trillion in the USA alone), and the dual nature of housing as an investment asset and consumption good, then there is an obvious requirement for further research.