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Endogenous sources of volatility in housing markets: the joint buyer-seller problem

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  • Elliot Anenberg
  • Patrick Bayer
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    Abstract

    This paper presents new empirical evidence that internal movement--selling one home and buying another--by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-60.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedgfe:2013-60

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    1. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    2. Genesove, David & Han, Lu, 2010. "Search and Matching in the Housing Market," CEPR Discussion Papers 7777, C.E.P.R. Discussion Papers.
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    19. Paul E. Carrillo, 2012. "An Empirical Stationary Equilibrium Search Model Of The Housing Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 203-234, 02.
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    22. Andrew Caplin & John Leahy, 2011. "Trading Frictions and House Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 283-303, October.
    23. Robert Novy-Marx, 2009. "Hot and Cold Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 1-22.
    24. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
    25. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
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