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House prices, sales, and time on the market : a search-theoretic framework

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  • Antonia Díaz
  • Belén Jerez

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Abstract

We build a search model of the housing market which captures the illiquidity of housing assets. In this model, households experience idiosyncratic shocks over time which affect how much they value their residence (e.g. the location of their job could change). When hit by a shock, households become mismatched and seek to buy a new home. Yet they take time to locate an appropriate housing unit and to sell their current home. Competitive forces are present in the housing market since, by posting lower prices, sellers increase the average number of buyer visits they get and sell their property faster. We characterize a stationary equilibrium for a fixed housing stock. We then calibrate a stochastic version of the model to reproduce selected aggregate statistics of the U.S. economy. The model is consistent with the high volatility of prices, sales and average time on the market, the positive correlation of prices and sales, and the negative correlation of prices and average time on the market observed in the data. This is not the case when we consider the perfectly competitive version of the model

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1033.

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Date of creation: Oct 2010
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Handle: RePEc:cte:werepe:we1033

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Keywords: House prices; Sales; Time on the market; Search frictions; Competitive search;

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References

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  1. Michael A. Arnold, 1999. "Search, Bargaining and Optimal Asking Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 453-481.
  2. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  3. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
  4. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  5. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2006. "Why Has House Price Dispersion Gone Up?," NBER Working Papers 12538, National Bureau of Economic Research, Inc.
  6. Antonia Diaz & Maria Jose Luengo Prado, 2008. "On the User Cost and Homeownership," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 584-613, July.
  7. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-69, June.
  8. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  9. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  10. François Ortalo-Magné & Antonio Merlo, 2002. "Bargaining over Residential Real Estate: Evidence from England," Wisconsin-Madison CULER working papers 02-02, University of Wisconsin Center for Urban Land Economic Research.
  11. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
  12. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  13. John Krainer, 2008. "Falling house prices and rising time on the market," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Mar 21.
  14. James Albrecht & Axel Anderson & Eric Smith & Susan Vroman, 2007. "Opportunistic Matching In The Housing Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 641-664, 05.
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Cited by:
  1. Albrecht, James & Gautier, Pieter A. & Vroman, Susan, 2010. "Directed Search in the Housing Market," CEPR Discussion Papers 7639, C.E.P.R. Discussion Papers.
  2. Derek Stacey, 2012. "Information, Commitment, and Separation in Illiquid Housing Markets," 2012 Meeting Papers 401, Society for Economic Dynamics.
  3. Conefrey, Thomas & Whelan, Karl, 2012. "Supply, Demand and Prices in the US Housing Market," Research Technical Papers 08/RT/12, Central Bank of Ireland.
  4. Antonia Díaz & Belén Jerez, 2010. "House prices, sales, and time on the market : a search-theoretic framework (Supplementary material)," Economics Working Papers we1034, Universidad Carlos III, Departamento de Economía.
  5. Allen Head & Huw Lloyd-Ellis & Hongfei Sun, 2012. "Search, Liquidity and the Dynamics of House Prices and Construction," Working Papers 1276, Queen's University, Department of Economics.
  6. Daniel Cooper & Rüdiger Bachmann, 2012. "Cyclical and sectoral transitions in the U.S. housing market," Working Papers 12-17, Federal Reserve Bank of Boston.
  7. Brian M. Peterson, 2012. "Fooled by Search: Housing Prices, Turnover and Bubbles," Working Papers 12-3, Bank of Canada.

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