CHAPTER 3
 OTHER ATYPICAL MOTIVATIONS

 Purchases by Out-of-State Buyers

 Anecdotal evidence suggests that out-of-state buyers, especially from higher-cost

areas, pay more for real estate than in-state buyers, especially those residing in lower cost

areas. This observation is explained by buyers "anchoring" to the higher values in their

home area and therefore being willing to pay a premium for real estate in lower-cost

areas. An example of anchoring are sales in neighboring states to California. Investors

from California will be more willing to offer a premium for a property in Arizona or Las

Vegas, since they are anchoring on the high prices of real estate in their home state. The

"anchoring" phenomenon is explained by behavioral literature. Slovic and Lichtenstein

(1971) and Tversky and Kahneman (1974) were the first academics to discuss heuristics

and biases. In the real estate literature, Northcraft and Neale (1987) presented strong

evidence of anchoring in property pricing that was similar for both amateurs and real

estate professionals. Other real estate studies that find evidence for anchoring include

Black and Diaz (1996), Diaz and Hansz (1997), Diaz and Wolverton (1998), and Diaz,

Zhao and Black (1999). Additional evidence of anchoring in real estate is seen in

appraisal smoothing. A large body of literature discusses smoothing in appraisal based

indexes, due to appraisal values lagging true prices and being too reliant on historical

prices (Geltner (1989) and Webb (1994)).

 Tumbull and Sirmans (1993) attribute observed out-state buyers' price premiums to

higher search costs. In their model, buyers with higher search costs will search less than