Housing markets: Auctions, granular shocks, and microstructure frictions

This paper examines the drivers of housing market volatility through dynamic search-and-matching models that incorporate auctions. Two versions of the model are developed: one in which buyers visit homes randomly and another where search is directed by seller reserve prices. The analysis demonstrates that granular shocks and microstructure frictions—arising from the interaction of idiosyncratic and infrequent transactions, search frictions, and auctions-based pricing—generate persistent volatility, even in large markets such as Los Angeles. The paper also identifies systematic weekly patterns in housing activity, which account for up to 60% of monthly variation in sales and listings due to calendar composition. Recognizing and filtering out these predictable fluctuations ensures that the model targets economically meaningful sources of volatility. Together, granular shocks, microstructure frictions, and weekly patterns explain 70%–80% of sales and listings volatility, with the remainder driven by exogenous shocks. These findings underscore the importance of auctions, granular shocks, microstructure frictions, and weekly patterns in understanding housing market dynamics.