In a survey Robert Frank finds that people say they would rather live in a 3000 square foot home when their neighbors have 2,000-square-foot bungalows than live in a 4000 square foot home in a neighborhood of McMansions. Greg Mankiw asks:

Do people really behave as reflected in this survey? I bet the 4,000 square foot

house surrounded by McMansions would sell for more than the 3,000 square foot house

surrounded by bungalows.

Let’s take it to the data. I regressed the sales price of about 12,000 houses in Northern Virginia on a bunch of housing characteristics including number of bathrooms, bedrooms, levels, age of the house and so forth. I also included the average sales price of homes in the same neighborhood. The result? Houses in neighborhoods with high average prices sell for more than similar houses in neighborhoods with lower average prices. Thus the prima facie evidence is that the same house is worth more if it is surrounded by more expensive houses – the opposite of Frank’s hypothesis.

Now it could be that the high average price of other homes in the neighborhood is controlling for unobservables of "your" home so here is a more precise test. I defined a variable (sqft-avgsqft) where sqft is the lot size of your house and avgsqft is the neighborhood average. I then split this into a positive difference, when your house is bigger than your average neighbor’s house and a negative difference when it is smaller. Bigger houses ought to sell for more everywhere but if Frank is right then square footage is more valuable when other people’s square footage is low (lording it over your neighbors). Similarly, if Frank is right people should be especially averse to living in small houses in big neighborhoods thus a negative difference should result in much lower prices.

Below you can find the relevant part of the regression. The bottom line is that houses with bigger lots sell for more (the positive coefficient on lotsqft) but the increase in price is less when your lot size is bigger than the average lot size. In other words, people do not want to own the biggest house in the neighborhood.

What about when your house is smaller than average? Here there is no penalty. Contra Frank, people do not mind having a small house in a neighborhood of McMansions.

SalesPrice Coef. Robust Std. Err. t P>t [95% Conf. Interval] pos dif -.4012873 .0992195 -4.04 0.000 -.5957739 -.2068006 neg dif .0352269 .0474728 0.74 0.458 -.0578278 .1282815 lotsqft .760224 .0527708 14.41 0.000 .6567846 .8636635

Although the data are inconsistent with Frank’s argument that the rich make the middle class worse off they are consistent with an alternative status effect in which people dislike lording it over their neighbors or in an alternative interpretation, the poor make the rich worse off.