Motivated Sellers & Predatory Buyers
We develop an equilibrium search model of the housing market where sellers may become distressed as they are unable to sell. A unique steady state equilibrium exists where distressed sellers attempt fire sales by accepting prices that are substantially below fundamental values. During periods where a large number of sellers are forced to liquidate customers exhibit predation: they hold off purchasing and strategically slow down the speed of trade, which in turn causes more sellers to become distressed. From sellers' point of view liquidity disappears when it is needed the most. The model naturally suggests several proxies of liquidity. Interestingly, the expected time on the market, one of the most frequently used statistics in the literature, does a poor job within the context of fire sales and predation.
|Date of creation:||2012|
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