List prices and “hot” real estate markets

In this article, we develop a novel microfoundation for the dynamics of “hot” real estate markets, emphasizing the strategic role of list prices. Our model features partial seller commitment: sellers must accept offers at or above the list price but retain discretion to reject lower bids. This institutional feature gives rise to two key forces in equilibrium: a bid inflation effect, in which high‐valuation buyers inflate their bids to improve their chance of acceptance, and a bid discouragement effect, in which marginal buyers strategically drop their bids well below list to avoid near‐list rejections. These effects create a discontinuity in the bidding function and help account for why bids just below list are not often observed. We show that this behavior results in higher list prices, increased sales prices, and a higher sales‐to‐list price ratio as the number of buyers increases—key indicators of a hot market. Unlike many traditional models, our framework allows for sales at, above, or below list price and sheds light on how bidding behavior and pricing respond to market conditions.