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Homeownership In An Uncertain World With Substantial Transaction Costs

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  • Margaret H. Smith
  • Gary Smith

Abstract

ABSTRACT This paper presents a dynamic model of residential real estate tenure decisions that takes into account the substantial transaction costs and the uncertain time paths of rents and prices. By temporarily postponing decisions, buyers and sellers obtain additional information and may avoid transactions that are costly to reverse. One implication is that the combination of high transaction costs and substantial uncertainty can create a large wedge between a household's reservation prices for buying and selling a home, which can explain why households do not switch back and forth between owning and renting as home prices fluctuate.

Suggested Citation

  • Margaret H. Smith & Gary Smith, 2007. "Homeownership In An Uncertain World With Substantial Transaction Costs," Journal of Regional Science, Wiley Blackwell, vol. 47(5), pages 881-896, December.
    • Handle: RePEc:bla:jregsc:v:47:y:2007:i:5:p:881-896
    DOI: 10.1111/j.1467-9787.2007.00534.x
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    References listed on IDEAS

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    1. Sven Rady, 1998. "Housing Market Fluctuations in a Life-Cycle Economy with Credit Constraints," FMG Discussion Papers dp296, Financial Markets Group.
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    Cited by:

    1. Gary Smith, 2014. "Why Are Some Home Values Resistant and Others Resilient?," International Real Estate Review, Global Social Science Institute, vol. 17(2), pages 223-240.
    2. Hui, Eddie C.M. & Chen, Jia & Chan, Ka Kwan Kevin, 2019. "House Hedging Model — which income group is more affected by risk?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 529(C), pages 1-1.
    3. Peter Karpestam, 2018. "Who Benefits from More Housing? A Panel Data Study on the Role of Housing in the Intermunicipal Migration of Different Age Cohorts in Sweden," The Review of Regional Studies, Southern Regional Science Association, vol. 48(3), pages 401-425, Winter.
    4. Michael Berlemann & Julia Freese, 2013. "Monetary policy and real estate prices: a disaggregated analysis for Switzerland," International Economics and Economic Policy, Springer, vol. 10(4), pages 469-490, December.

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