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Buying First or Selling First? Buyer-Seller Decisions and Housing Market Volatility

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Listed:
  • Plamen Nenov

    (Norwegian Business School (BI))

  • Espen Moen

    (Norwegian Business School-BI)

Abstract

Housing transactions by existing homeowners take two steps, a purchase of a new property and sale of the old housing unit. These two decisions are not independent, and their sequence may depend on the state of the housing market. This paper shows how the sequence of buyer-seller decisions depends on, and in turn, affects housing market conditions in an equilibrium search-and-matching model of the housing market. Under a simple payoff condition, we show that the decisions to "buy first" or "sell first" among existing homeowners are strategic complements - homeowners prefer to "buy first" whenever there are more buyers than sellers in the market. This behavior leads to multiple steady state equilibria and to dynamic equilibria featuring low frequency self-fulfilling fluctuations in house prices and time on the market. The model is broadly consistent with stylized facts about the housing market.

Suggested Citation

  • Plamen Nenov & Espen Moen, 2014. "Buying First or Selling First? Buyer-Seller Decisions and Housing Market Volatility," 2014 Meeting Papers 471, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:471
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    File URL: https://economicdynamics.org/meetpapers/2014/paper_471.pdf
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    References listed on IDEAS

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    1. Guido Menzio & Shouyong Shi, 2010. "Directed Search on the Job, Heterogeneity, and Aggregate Fluctuations," American Economic Review, American Economic Association, vol. 100(2), pages 327-332, May.
    2. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    3. Antonia Díaz & Belén Jerez, 2013. "House Prices, Sales, And Time On The Market: A Search‐Theoretic Framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 837-872, August.
    4. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
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    Cited by:

    1. Leung, Charles Ka Yui & Tse, Chung-Yi, 2017. "Flipping the Housing Market," Globalization Institute Working Papers 301, Federal Reserve Bank of Dallas.
    2. Leung, Charles Ka Yui & Tse, Chung-Yi, 2017. "Flipping in the housing market," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 232-263.

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