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House prices, sales, and time on the market : a search-theoretic framework

  • Antonia Díaz
  • Belén Jerez

    ()

We build a search model of the housing market which captures the illiquidity of housing assets. In this model, households experience idiosyncratic shocks over time which affect how much they value their residence (e.g. the location of their job could change). When hit by a shock, households become mismatched and seek to buy a new home. Yet they take time to locate an appropriate housing unit and to sell their current home. Competitive forces are present in the housing market since, by posting lower prices, sellers increase the average number of buyer visits they get and sell their property faster. We characterize a stationary equilibrium for a fixed housing stock. We then calibrate a stochastic version of the model to reproduce selected aggregate statistics of the U.S. economy. The model is consistent with the high volatility of prices, sales and average time on the market, the positive correlation of prices and sales, and the negative correlation of prices and average time on the market observed in the data. This is not the case when we consider the perfectly competitive version of the model

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1033.

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Date of creation: Oct 2010
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Handle: RePEc:cte:werepe:we1033
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  1. John Krainer, 2008. "Falling house prices and rising time on the market," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar21.
  2. Antonio M. Merlo & François Ortalo-Magné, 2002. "Bargaining over Residential Real Estate: Evidence from England," CESifo Working Paper Series 778, CESifo Group Munich.
  3. Williams, Joseph T, 1995. "Pricing Real Assets with Costly Search," Review of Financial Studies, Society for Financial Studies, vol. 8(1), pages 55-90.
  4. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  5. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  6. Antonia Díaz & Maria J. Luengo-Prado, 2006. "On The User Cost and Homeownership," Working Papers 2006-14, FEDEA.
  7. Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
  8. David Genesove & Christopher J. Mayer, 1993. "Equity and time to sale in the real estate market," Working Papers 93-6, Federal Reserve Bank of Boston.
  9. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2006. "Why Has House Price Dispersion Gone Up?," NBER Working Papers 12538, National Bureau of Economic Research, Inc.
  10. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
  11. Makoto Nakajima, 2005. "Rising Earnings Instability and Prices of Housing and Financial Assets," 2005 Meeting Papers 211, Society for Economic Dynamics.
  12. Michael A. Arnold, 1999. "Search, Bargaining and Optimal Asking Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 453-481.
  13. Abdullah Yavaş, 1992. "A Simple Search and Bargaining Model of Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(4), pages 533-548.
  14. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-92, December.
  15. James Albrecht & Axel Anderson & Eric Smith & Susan Vroman, 2007. "Opportunistic Matching In The Housing Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 641-664, 05.
  16. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
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