Home bias in finance means that investors prefer investing in their home country rather than in foreign countries even when they understand there may be better opportunities abroad. Some studies point to a domestic kind of home bias – people are more likely to buy stocks of companies with offices or headquarters near where they live. A sort of familiarity breeds confidence in investment expectations idea. Now a research paper by four economists adds a new wrinkle to home bias by exploring the choice between investing in stocks versus investing in a second home as an investment property. If there are no companies located in their home town they buy a second home as an investment instead of buying stocks.
The abstract from the paper:
Using data on household portfolios and mortgage originations, we find that households residing in a city with few publicly traded firms headquartered there are more likely to own an investment home nearby. Households in these areas are also less likely to own stocks. This only-game-in-town effect is more pronounced for households living in high credit quality areas, who can access financing to afford a second home. This effect also becomes pronounced for households living in low credit quality areas after 2002 when securitization made it easier for these households to buy second homes. Cities with few local stocks have in equilibrium higher price-to-rent ratios, making it more attractive to rent, and lower (primary residence) homeownership rates.
The paper, When Real Estate is the Only Game in Town is by Hyun-Soo Choi, Harrison Hong, Jeffrey Kubik and Jeffrey P. Thompson; it is from the NBER as NBER 19798, (www.nber.org)