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Endogenous sources of volatility in housing markets: the joint buyer-seller problem

  • Elliot Anenberg
  • Patrick Bayer

This paper presents new empirical evidence that internal movement--selling one home and buying another--by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-60.

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Date of creation: 2013
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Handle: RePEc:fip:fedgfe:2013-60
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  1. Paul E. Carrillo, 2012. "An Empirical Stationary Equilibrium Search Model Of The Housing Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(1), pages 203-234, 02.
  2. Engelhardt, Gary V., 2003. "Nominal loss aversion, housing equity constraints, and household mobility: evidence from the United States," Journal of Urban Economics, Elsevier, vol. 53(1), pages 171-195, January.
  3. Guido Menzio & Shouyong Shi, 2008. "Efficient Search on the Job and the Business Cycle, Second Version," PIER Working Paper Archive 09-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Feb 2009.
  4. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
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  6. Jerez, Belén & Díaz, Antonia, 2010. "House prices, sales, and time on the market : a search-theoretic framework," UC3M Working papers. Economics we1033, Universidad Carlos III de Madrid. Departamento de Economía.
  7. 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.
  8. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
  9. Raven S. Molloy & Hui Shan, 2011. "The post-foreclosure experience of U.S. households," Finance and Economics Discussion Series 2011-32, Board of Governors of the Federal Reserve System (U.S.).
  10. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
  11. Atif R. Mian & Amir Sufi, 2009. "House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis," NBER Working Papers 15283, National Bureau of Economic Research, Inc.
  12. Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 397-415.
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  14. Lee, Donghoon & Wolpin, Kenneth I., 2010. "Accounting for wage and employment changes in the US from 1968-2000: A dynamic model of labor market equilibrium," Journal of Econometrics, Elsevier, vol. 156(1), pages 68-85, May.
  15. Allen Head & Huw Lloyd-Ellis & Hongfei Sun, 2012. "Search, Liquidity and the Dynamics of House Prices and Construction," Working Papers 1276, Queen's University, Department of Economics.
  16. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Working Papers tecipa-437, University of Toronto, Department of Economics.
  17. Edward L. Glaeser & Joseph Gyourko & Raven E. Saks, 2005. "Why Have Housing Prices Gone Up?," Harvard Institute of Economic Research Working Papers 2061, Harvard - Institute of Economic Research.
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  19. Sam Schulhofer-Wohl, 2011. "Negative Equity Does Not Reduce Homeowners' Mobility," NBER Working Papers 16701, National Bureau of Economic Research, Inc.
  20. repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09j003nctkn is not listed on IDEAS
  21. Genesove, David & Han, Lu, 2010. "Search and Matching in the Housing Market," CEPR Discussion Papers 7777, C.E.P.R. Discussion Papers.
  22. Anenberg, Elliot, 2011. "Loss aversion, equity constraints and seller behavior in the real estate market," Regional Science and Urban Economics, Elsevier, vol. 41(1), pages 67-76, January.
  23. John Y. Campbell & Stefano Giglio & Parag Pathak, 2009. "Forced Sales and House Prices," NBER Working Papers 14866, National Bureau of Economic Research, Inc.
  24. Robert Novy-Marx, 2009. "Hot and Cold Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(1), pages 1-22.
  25. Andrew Caplin & John Leahy, 2008. "Trading Frictions and House Price Dynamics," NBER Working Papers 14605, National Bureau of Economic Research, Inc.
  26. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877.
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