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Board of Governors of the Federal Reserve System (U.S.)
Finance and Economics Discussion Series
Endogenous sources of volatility in housing markets: the joint buyer-seller problem
Elliot Anenberg
Patrick Bayer
Abstract

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.


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Elliot Anenberg & Patrick Bayer, Endogenous sources of volatility in housing markets: the joint buyer-seller problem, Board of Governors of the Federal Reserve System (U.S.), Finance and Economics Discussion Series 2013-60, 2013.
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