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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. François Ortalo-Magné & Antonio Merlo, 2002. "Bargaining over Residential Real Estate: Evidence from England," Wisconsin-Madison CULER working papers, University of Wisconsin Center for Urban Land Economic Research 02-02, University of Wisconsin Center for Urban Land Economic Research.
  2. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 641-664, 05.
  3. Genesove, D. & Mayer, C.J., 1994. "Equity and Time to Sale in the Real Estate Market," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 94-02, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  5. John Krainer, 2008. "Falling house prices and rising time on the market," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue mar21.
  6. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2006. "Why Has House Price Dispersion Gone Up?," NBER Working Papers 12538, National Bureau of Economic Research, Inc.
  7. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
  8. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  9. Michael A. Arnold, 1999. "Search, Bargaining and Optimal Asking Prices," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 27(3), pages 453-481.
  10. 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.
  11. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 385-411, April.
  12. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan, Palgrave Macmillan.
  13. Antonia Díaz & Maria J. Luengo-Prado, 2006. "On The User Cost and Homeownership," Working Papers 2006-14, FEDEA.
  14. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  15. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
  16. Makoto Nakajima, 2005. "Rising Earnings Instability and Prices of Housing and Financial Assets," 2005 Meeting Papers, Society for Economic Dynamics 211, Society for Economic Dynamics.
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