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Search, Liquidity and the Dynamics of House Prices and Construction

Author Info

  • Allen Head

    ()

    (Queen`s University)

  • Huw Lloyd-Ellis

    ()

    (Queen`s University)

  • Hongfei Sun

    ()

    (Queen`s University)

Abstract

We characterize the dynamics of relative house prices, housing sales, construction rates and population growth in response to city-specific income shocks for 106 US cities. We then develop a dynamic search model of the housing market in which construction, the entry of buyers, house prices and sales are endogenously determined in equilibrium. Our theory generates dynamics that are qualitatively consistent with our empirical observations and a version of the economy calibrated to match long-run features of the housing market in U.S. cities offers a substantial quantitative improvement over similar models with no search. In particular, variation in the time it takes to sell a house (i.e. the house's liquidity) induces house values and transaction prices to exhibit momentum, or serially correlated growth.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1276.pdf
File Function: First version 2012
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1276.

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Length: 70 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:qed:wpaper:1276
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Keywords: House prices; liquidity; search; construction; dynamic panel;

Other versions of this item:

Find related papers by JEL classification:
  • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
  • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
  • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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  1. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
  2. Michael Binder & Cheng Hsiao & M. Hashem Pesaran, 2000. "Estimation and Inference In Short Panel Vector Autoregressions with Unit Roots And Cointegration," CESifo Working Paper Series 374, CESifo Group Munich.
  3. Allen Head & Huw Lloyd-Ellis, 2012. "Housing Liquidity, Mobility, and the Labour Market," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1559-1589.
  4. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2006. "Why Has House Price Dispersion Gone Up?," NBER Working Papers 12538, National Bureau of Economic Research, Inc.
  5. Charles Ka Yui Leung & Youngman Chun Fai Leong & Ida Yin Sze Chan, 2002. "TOM: Why Isn’t Price Enough?," International Real Estate Review, Asian Real Estate Society, vol. 5(1), pages 91-115.
  6. Gerdie Everaert, 2013. "Orthogonal to backward mean transformation for dynamic panel data models," Econometrics Journal, Royal Economic Society, vol. 16(2), pages 179-221, 06.
  7. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  8. 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.
  9. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  10. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  11. Joseph Gyourko & Albert Saiz, 2006. "Construction Costs And The Supply Of Housing Structure," Journal of Regional Science, Wiley Blackwell, vol. 46(4), pages 661-680.
  12. John Krainer, 2008. "Falling house prices and rising time on the market," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar21.
  13. Jason Allen & Robert Amano & David P. Byrne & Allan W. Gregory, 2009. "Canadian city housing prices and urban market segmentation," Canadian Journal of Economics, Canadian Economics Association, vol. 42(3), pages 1132-1149, August.
  14. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  15. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1962-1985, October.
  16. Monika Piazzesi & Martin Schneider, 2009. "Momentum Traders in the Housing Market: Survey Evidence and a Search Model," American Economic Review, American Economic Association, vol. 99(2), pages 406-11, May.
  17. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
  18. Andrew Caplin & John Leahy, 2011. "Trading Frictions and House Price Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 283-303, October.
  19. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
  20. Albrecht, James W. & Gautier, Pieter A. & Vroman, Susan B., 2003. "Matching with multiple applications," Economics Letters, Elsevier, vol. 78(1), pages 67-70, January.
  21. Morris A. Davis & François Ortalo-Magné, 2007. "Household Expenditures, Wages, Rents," CESifo Working Paper Series 2156, CESifo Group Munich.
  22. 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.
  23. Davis, Morris A. & Palumbo, Michael G., 2008. "The price of residential land in large US cities," Journal of Urban Economics, Elsevier, vol. 63(1), pages 352-384, January.
  24. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
  25. Malpezzi, Stephen, 1999. "A Simple Error Correction Model of House Prices," Journal of Housing Economics, Elsevier, vol. 8(1), pages 27-62, March.
  26. 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.
  27. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
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Cited by:

  1. Plamen Nemov, 2015. "Online Appendix to "Regional Reallocation and Housing Markets in a Model of Frictional Migration"," Technical Appendices 14-22, Review of Economic Dynamics.
  2. Eric Smith, 2015. "High and Low Activity Spells in Housing Markets," CESifo Working Paper Series 5601, CESifo Group Munich.
  3. Elliot Anenberg & Patrick Bayer, 2013. "Endogenous sources of volatility in housing markets: the joint buyer-seller problem," Finance and Economics Discussion Series 2013-60, Board of Governors of the Federal Reserve System (U.S.).
  4. Edward L. Glaeser & Charles G. Nathanson, 2014. "Housing Bubbles," NBER Working Papers 20426, National Bureau of Economic Research, Inc.
  5. Daniel Tortorice, 2015. "Long Run Expectations, Learning and the U.S. Housing Market," Working Papers 85, Brandeis University, Department of Economics and International Businesss School.
  6. Allen Head & Huw Lloyd-Ellis & Hongfei Sun, 2016. "Search, Liquidity, and the Dynamics of House Prices and Construction: Corrigendum," American Economic Review, American Economic Association, vol. 106(4), pages 1214-19, April.
  7. Martin Schneider & Johannes Stroebel & Monika Piazzesi, 2012. "Segmented Housing Search," 2012 Meeting Papers 670, Society for Economic Dynamics.
  8. Kashiwagi, Masanori, 2014. "A search-theoretic model of the rental and homeownership markets," Journal of Housing Economics, Elsevier, vol. 26(C), pages 33-47.
  9. Edward L. Glaeser & Charles G. Nathanson, 2015. "An Extrapolative Model of House Price Dynamics," NBER Working Papers 21037, National Bureau of Economic Research, Inc.
  10. Aaron Hedlund, 2014. "The Cyclical Dynamics of Illiquid Housing, Debt, and Foreclosures," Working Papers 1416, Department of Economics, University of Missouri.
  11. Crocker H. Liu & Adam Nowak & Stuart Rosenthal, 2014. "Bubbles, Post-Crash Dynamics, and the Housing Market," Working Papers 14-18, Department of Economics, West Virginia University.
  12. Charles Nathanson & Edward Glaeser, 2015. "An Extrapolative Model of House Price Dynamics," 2015 Meeting Papers 1108, Society for Economic Dynamics.
  13. Pascal Towbin & Sebastian Weber, 2016. "Price expectations and the US housing boom," Working Papers 2016-06, Swiss National Bank.
  14. Zhou, Zhengyi, 2016. "Overreaction to policy changes in the housing market: Evidence from Shanghai," Regional Science and Urban Economics, Elsevier, vol. 58(C), pages 26-41.
  15. Elliot Anenberg, 2012. "Information frictions and housing market dynamics," Finance and Economics Discussion Series 2012-48, Board of Governors of the Federal Reserve System (U.S.).
  16. Alexander N. Bogin & William M. Doerner & William D. Larson, 2016. "Local House Price Growth Accelerations," Staff Working Papers 16-02, Federal Housing Finance Agency.
  17. Halket, Jonathan & Pignatti Morano di Custoza, Matteo, 2015. "Homeownership and the scarcity of rentals," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 107-123.
  18. Allen Head & Hongfei Sun & Chenggang Zhou, 2016. "Default, Mortgage Standards and Housing Liquidity," Working Papers 1359, Queen's University, Department of Economics.
  19. repec:esx:essedp:775 is not listed on IDEAS
  20. Timothy McQuade & Adam Guren, 2015. "How Do Foreclosures Exacerbate Housing Downturns?," 2015 Meeting Papers 40, Society for Economic Dynamics.

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