Search, Liquidity, and the Dynamics of House Prices and Construction

Abstract

The dynamics of house prices, sales, construction, and population growth in response to city-specific income shocks are characterized for 106 US cities. A dynamic model of search in the housing market in which construction, the entry of buyers, house prices, and sales are determined in equilibrium is then developed. The theory generates dynamics qualitatively consistent with the observations and a version calibrated to match key features of the US housing market offers a substantial quantitative improvement over models without search. In particular, variation in the time it takes to sell induces transaction prices to exhibit serially correlated growth. (JEL D83, R21, R23, R31)We explore the consequences of time-consuming search and matching for the dynamics of house prices, sales, and construction at the city level. First, we characterize the impact of city-specific income shocks on the short-run dynamics of average house prices, home sales, construction, and population growth for a panel of US cities. We then develop a model in which the entry of new buyers and the construction of new houses in response to such shocks are endogenously determined. Our theory generates serial correlation in the growth rates of house prices and construction, even if income is strictly mean-reverting following shocks. 1 When calibrated to data on US cities our model accounts for over 80 percent of the variance of house price movements driven by city-specific income shocks and nearly half of the observed autocorrelation of house price growth.In our empirical analysis, we estimate a structural panel vector autoregressive (VAR) model using city-level observations on the variables listed above. We focus 1 This behavior has been referred to as "price momentum" in the literature (e.g., Glaeser et al. 2011).

The Cyclical Dynamics of Illiquid Housing, Debt, and Foreclosures

“…Most related to my work here are recent contributions by Novy-Marx (2009), Burnside, Eichenbaum, and Rebelo (2014), Caplin andLeahy (2011), Díaz andJerez (2013), and Head, Lloyd-Ellis, and Sun (2014). Novy-Marx (2009) and Díaz and Jerez (2013) both show how search frictions magnify shocks to fundamentals, with Díaz and Jerez (2013) emphasizing the importance of directed search, rather than random search, in housing markets.…”

“…First, house prices exhibit short-run momentum, as documented in Case and Shiller (1989), Capozza, Hendershott, and Mack (2004), Head, Lloyd-Ellis, and Sun (2014, and several other papers. Second, house price busts tend to be slower and shallower than booms-with some notable exceptions-which suggests a degree of downward price stickiness.…”

Competitive search equilibrium with multidimensional heterogeneity and two-sided ex-ante investments

“…Whereas these authors consider simple environments with homogeneous buyers and/or sellers, subsequent 1 Search models are becoming increasingly popular in quantitative studies of the housing market. See, among others, Díaz and Jerez (2013), Head, Lloyd-Ellis, and Sun (2014) and Ngai and Tenreyro (2014), and the literature cited therein.…”

What Causes the Positive Price-Turnover Correlation in European Housing Markets

“…prices (see Case and Shiller, 1989, or more recently Lai and Order, 2010;Beracha and Skiba, 2011;Head et al, 2014;Kuang, 2014). A common explanation is that housing market frictions (i.e.…”