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Search, Liquidity and the Dynamics of House Prices and Construction

Author

Listed:
  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:qed:wpaper:1276
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1276.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    House prices; liquidity; search; construction; dynamic panel;

    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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