A note on the efficiency in the housing market with search frictions

This paper studies efficiency in the housing market in the presence of search frictions and endogenous entry of buyers and sellers. These two features are essential to explain the housing market stylized facts and to generate an upward-sloping Beveridge Curve in the housing market. Search frictions and endogenous entry create two externalities in the market. First, there is a congestion externality common to markets with search frictions. Sellers do not internalize the effect of listing a house for sale on other sellers’ probability of finding a buyer. Second, the endogenous entry of buyers leads to a participation externality, as new entrants in the market raise search costs for all buyers. The equilibrium is inefficient even when the Hosios-Mortensen-Pissarides condition holds. Using a calibration to the US housing market, we quantify the size of these externalities and how far the housing market is from the optimal allocation. The optimal vacancy rate and time-to-sell are about half their equilibrium counterparts, whereas the optimal number of buyers and homeowners are above their decentralized equilibrium values. Finally, we investigate how housing market policies restore efficiency in the housing market.