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Endogenous Market Segmentation and the Volatility of House Prices


  • Julia Thomas

    (Ohio State University)

  • Aubhik Khan

    (Ohio State University)


We study an economy where households face transactions costs of participating in the housing market. In response to these costs, households choose to buy and sell houses infrequently. This, in turn, implies that the value of the typical transaction is large relative to income. In this way our model captures two essential features of household-level adjustments to residential capital. Moreover, it implies that, in any period, only a fraction of households are active in the housing market, and that this fraction evolves with the aggregate state of the economy. We find that this endogenous market segmentation amplifies and propagates the response in the relative price of housing following aggregate and sectoral shocks. Because those households currently active in the real estate market must absorb changes to the aggregate housing stock in equilibrium, market segmentation exacerbates changes in house prices. Moreover, it implies large and persistent changes in the distribution of households following an aggregate shock, which themselves cause additional movements in prices. Thus households' optimal (S,s) policies, driven by nonconvex transactions costs, not only induce lumpy adjustment at the individual level, but also explain a nontrivial fraction of observed excess price volatility in real estate markets.

Suggested Citation

  • Julia Thomas & Aubhik Khan, 2009. "Endogenous Market Segmentation and the Volatility of House Prices," 2009 Meeting Papers 1127, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1127

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    References listed on IDEAS

    1. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
    2. Campbell, John Y. & Cocco, Joao F., 2007. "How do house prices affect consumption? Evidence from micro data," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 591-621, April.
    3. François Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
    4. Aubhik Khan & Julia K. Thomas, 2008. "Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics," Econometrica, Econometric Society, vol. 76(2), pages 395-436, March.
    5. Iacoviello, Matteo & Pavan, Marina, 2013. "Housing and debt over the life cycle and over the business cycle," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 221-238.
    6. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
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