Endogenous Sources of Volatility in Housing Markets: The Joint Buyer-Seller Problem

Other Article (Working Paper)

This paper presents new empirical evidence that internal movement - selling one home and buying another - by existing homeowners within a metropolitan housing market is especially volatile and the main driver of fluctuations in transaction volume over the housing market cycle. We develop a dynamic search equilibrium model that shows that the strong pro-cyclicality of internal movement is driven by the cost of simultaneously holding two homes, which varies endogenously over the cycle. We estimate the model using data on prices, volume, time-on-market, and internal moves drawn from Los Angeles from 1988-2008 and use the fitted model to show that frictions related to the joint buyer-seller problem: (i) substantially amplify booms and busts in the housing market, (ii) create counter-cyclical build-ups of mismatch of existing owners with their homes, and (iii) generate externalities that induce significant welfare loss and excess price volatility.

Duke Authors

Cited Authors

  • Anenberg, E; Bayer, P

Published Date

  • December 5, 2014

Published In

  • Economic Research Initiatives at Duke (Erid)

Pages

  • 63