Working Paper: CEPR ID: DP9946
Authors: Espen R. Moen; Plamen T. Nenov
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.
Keywords: excess volatility; housing market; order of transactions; search frictions; self-fulfilling fluctuations
JEL Codes: R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more buyers than sellers (D41) | homeowners prefer to buy first (R21) |
| homeowners prefer to buy first (R21) | lower expected time on the market for sellers (R31) |
| homeowners prefer to buy first (R21) | feedback loop reinforcing initial decision (D91) |
| decisions of homeowners (R21) | self-fulfilling fluctuations in house prices (E32) |
| market conditions (P42) | homeowner decisions (R21) |
| homeowner decisions (R21) | fluctuations in house prices (E32) |