IDEAS home Printed from https://ideas.repec.org/p/ecl/riceco/14-016.html
   My bibliography  Save this paper

The Home Selling Problem: Theory and Evidence

Author

Listed:
  • Merlo, Antonio

    (Rice University)

  • Ortalo-Magne, Francois

    (University of WI)

  • Rust, John

    (Georgetown University)

Abstract

This paper formulates and solves the problem of a homeowner who wants to sell her house for the maximum possible price net of transactions costs (including real estate commissions). The optimal selling strategy consists of an initial list price with subsequent weekly decisions on how much to adjust the list price until the home is sold or withdrawn from the market. The solution also yields a sequence of reservation prices that determine whether the homeowner should accept offers from potential buyers who arrive stochastically over time with an expected arrival rate that is a decreasing function of the list price. We estimate the model using a rich data set of complete transaction histories for 780 residential properties in England introduced by Merlo and Ortalo-Magne (2004). For each home in the sample, the data include all listing price changes and all offers made on the home between initial listing and the final sale agreement. The estimated model fits observed list price dynamics and other key features of the data well. In particular, we show that a very small "menu cost" of changing the listing price (estimated to equal 10 thousandths of 1% of the house value, or approximately 10 GBP for a home worth 100,000 GBP), is sufficient to explain the high degree of "stickiness" of listing prices observed in the data.

Suggested Citation

  • Merlo, Antonio & Ortalo-Magne, Francois & Rust, John, 2014. "The Home Selling Problem: Theory and Evidence," Working Papers 14-016, Rice University, Department of Economics.
  • Handle: RePEc:ecl:riceco:14-016
    as

    Download full text from publisher

    File URL: http://economics.rice.edu/rise/working-papers/home-selling-problem-theory-and-evidence
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Han Bin Kang & Mona J. Gardner, 1989. "Selling Price and Marketing Time in the Residential Real Estate Market," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 21-35.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
    3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    4. Donald Haurin, 1988. "The Duration of Marketing Time of Residential Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 396-410.
    5. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1233-1260.
    6. 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.
    7. John R. Knight & C. F. Sirmans & Geoffrey K. Turnbull, 1998. "List Price Information in Residential Appraisal and Underwriting," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 59-76.
    8. 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.
    9. Abdullah Yavas & Shiawee Yang, 1995. "The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 347-368.
    10. Horowitz, Joel L, 1992. "The Role of the List Price in Housing Markets: Theory and an Econometric Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 115-129, April-Jun.
    11. Curtis R. Taylor, 1999. "Time-on-the-Market as a Sign of Quality," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 555-578.
    12. John R. Knight, 2002. "Listing Price, Time on Market, and Ultimate Selling Price: Causes and Effects of Listing Price Changes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 213-237.
    13. Merlo, Antonio & Ortalo-Magne, Francois, 2004. "Bargaining over residential real estate: evidence from England," Journal of Urban Economics, Elsevier, vol. 56(2), pages 192-216, September.
    14. Norman G. Miller & Michael A. Sklarz, 1987. "Pricing Strategies and Residential Property Selling Prices," Journal of Real Estate Research, American Real Estate Society, vol. 2(1), pages 31-40.
    15. Zuehlke, Thomas W, 1987. "Duration Dependence in the Housing Market," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 701-704, November.
    16. 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, May.
    17. Salant, Stephen W, 1991. "For Sale by Owner: When to Use a Broker and How to Price the House," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 157-173, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eerola, Essi & Lyytikäinen, Teemu, 2015. "On the role of public price information in housing markets," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 74-84.
    2. Hedlund, Aaron, 2016. "Illiquidity and its discontents: Trading delays and foreclosures in the housing market," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 1-13.
    3. repec:eee:tefoso:v:125:y:2017:i:c:p:137-153 is not listed on IDEAS
    4. Han, Lu & Strange, William C., 2016. "What is the role of the asking price for a house?," Journal of Urban Economics, Elsevier, vol. 93(C), pages 115-130.
    5. Yu Zhu & Randall Wright & Damien Gaumont, 2017. "Modeling House Prices," 2017 Meeting Papers 744, Society for Economic Dynamics.
    6. Paul E. Carrillo & William M. Doerner & William D. Larson, 2018. "House Price Markups and Mortgage Defaults," FHFA Staff Working Papers 18-02, Federal Housing Finance Agency.
    7. Duranton, Gilles & Puga, Diego, 2015. "Urban Land Use," Handbook of Regional and Urban Economics, Elsevier.
    8. John Rust & Sungjin Cho, 2018. "Optimal Dynamic Hotel Pricing," 2018 Meeting Papers 179, Society for Economic Dynamics.
    9. Liu, Crocker H. & Nowak, Adam & Rosenthal, Stuart S., 2016. "Housing price bubbles, new supply, and within-city dynamics," Journal of Urban Economics, Elsevier, vol. 96(C), pages 55-72.
    10. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, Elsevier.
    11. David Cantala & Damián Gibaja, 2018. "On uniqueness of equilibrium prices in a Bayesian assignment game," Serie documentos de trabajo del Centro de Estudios Económicos 2018-06, El Colegio de México, Centro de Estudios Económicos.
    12. repec:eee:jhouse:v:37:y:2017:i:c:p:42-51 is not listed on IDEAS
    13. Anenberg, Elliot & Laufer, Steven, 2014. "Using Data on Seller Behavior to Forecast Short-run House Price Changes," Finance and Economics Discussion Series 2014-16, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:riceco:14-016. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/dericus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.