Working Paper: NBER ID: w19875
Authors: Pablo Kurlat; Johannes Stroebel
Abstract: We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about neighborhood values than buyers, but there are some sellers and some buyers that are better informed than their peers. We propose a new theoretical framework for analyzing such markets with many heterogeneous assets and differentially informed agents. Consistent with the predictions from this framework, we find that changes in the seller composition towards (i) more informed sellers and (ii) sellers with a larger supply elasticity predict subsequent house-price declines and demographic changes in that neighborhood. This effect is larger for houses whose value depends more on neighborhood characteristics, and smaller for houses bought by more informed buyers. Our findings suggest that home owners have superior information about important neighborhood characteristics, and exploit this information to time local market movements.
Keywords: Asymmetric Information; Real Estate Markets; Seller Composition; House Price Dynamics
JEL Codes: D53; D82; G14; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the share of real estate professionals among sellers (L85) | decline in future neighborhood price appreciation (R20) |
| higher land share (Q15) | more sensitivity to neighborhood price changes (R20) |
| increase in the share of relatively new sellers (D16) | decline in annualized returns (G12) |
| seller composition (L14) | price changes (P22) |