Working Paper: CEPR ID: DP16133
Authors: Hans Koster; Jan Rouwendal
Abstract: When attempting to sell a house, setting a low or high list price presents a fundamental trade-off between achieving a lower sales price quickly or waiting for higher bids. We propose a parsimonious model to analyse the decision-making process of setting the list price, which is governed by a discount rate. Our model shows that this `gross' discount rate, which reflects the seller's motivation and the `pure' time preference, is a key factor in understanding the list price-setting decision. Using data from over 1 million housing sales in the Netherlands, we derive gross discount rates in both bilateral bargaining situations and bidding wars. Our results indicate that these discount rates range from 15-50%, are lower for highly educated sellers, and are higher for sellers who have moved before listing the property. We suggest that these high discount rates may be a result of the seller's unfamiliarity with the selling process and associated uncertainty, as well as the presence of listing costs.
Keywords: home seller behaviour; list price; sales price; sales time; time preference; bidding wars; undervaluation
JEL Codes: H43; R21; R30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sellers who have already moved (L85) | Higher discount rates (E43) |
| Higher education levels of sellers (I23) | Lower discount rates (E43) |
| Loss aversion and stress associated with selling (G41) | Higher discount rates (E43) |
| Bidding wars (D44) | Influences pricing strategy employed by sellers (L11) |
| Higher price growth in the neighborhood (R31) | Lower markups for sellers (D40) |