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Search, Liquidity and the Dynamics of House Prices and Construction

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  • Allen Head

    ()
    (Queen`s University)

  • Huw Lloyd-Ellis

    ()
    (Queen`s University)

  • Hongfei Sun

    ()
    (Queen`s University)

Abstract

We characterize the dynamics of relative house prices, housing sales, construction rates and population growth in response to city-specific income shocks for 106 US cities. We then develop a dynamic search model of the housing market in which construction, the entry of buyers, house prices and sales are endogenously determined in equilibrium. Our theory generates dynamics that are qualitatively consistent with our empirical observations and a version of the economy calibrated to match long-run features of the housing market in U.S. cities offers a substantial quantitative improvement over similar models with no search. In particular, variation in the time it takes to sell a house (i.e. the house's liquidity) induces house values and transaction prices to exhibit momentum, or serially correlated growth.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1276.pdf
File Function: First version 2012
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1276.

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Length: 70 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:qed:wpaper:1276

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Keywords: House prices; liquidity; search; construction; dynamic panel;

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References

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Cited by:
  1. Elliot Anenberg, 2012. "Information frictions and housing market dynamics," Finance and Economics Discussion Series 2012-48, Board of Governors of the Federal Reserve System (U.S.).
  2. Elliot Anenberg & Patrick Bayer, 2013. "Endogenous sources of volatility in housing markets: the joint buyer-seller problem," Finance and Economics Discussion Series 2013-60, Board of Governors of the Federal Reserve System (U.S.).
  3. Elliot Anenberg & Patrick Bayer, 2013. "Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem," NBER Working Papers 18980, National Bureau of Economic Research, Inc.

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