Price cutting behavior in residential markets

Journal of Housing Economics, 2013

Empirical evidence on the relationship between real estate price and selling time (timeon-market (TOM)) is mixed as to whether the price-TOM relationship is positive or negative. Competing theories also suggest opposite predictions about TOM's impact on selling price. The article examines the price-TOM relationship against the background of varying market conditions and highlights the impact of these conditions on the relationship. The theoretical analysis extends search theory and Lazear's model to changing market conditions and reconciles their predictions on the relationship. The empirical analysis refines the investigation of the price-TOM relationship by revealing the cross-effect of market conditions and TOM on price. The findings confirm that the price-TOM relationship can indeed be positive or negative depending on these conditions. However, except for the case of an extremely bad market, the relationship is generally positive. This outcome occurs because search effort (indicated by TOM) brings significant price benefit that is large enough to offset all but the worst market price declines. Additional analysis confirms that the findings are not altered by the potential endogeneity between price and TOM.

A seller sets the list price based upon their ex-ante perception of the trade-off between marketing duration versus transaction price, which depends on the liquidity of the property and the depth of the market. As such, list prices reflect property, market, and seller characteristics. In addition, Genesove and Mayer (2001) and Bokhari and Geltner (2011) use prospect theory to motivate how expected nominal losses and gains from sale can also influence list prices. We consider these multiple factors affecting list prices through a rich dataset from the National Association of Realtors, which contains variables on seller motivations, structure liquidity, and other difficult to observe variables such as seller age, race, and income. Upon deciding to sell their house, the owner faces the problem of setting the initial asking price. Sellers routinely set list prices higher than expected transaction prices to allow for negotiation with potential buyers. Additionally, sellers need to set higher list prices to obtain higher transaction prices. But owners cannot markup their list prices by too much or they risk materially delaying the sale, especially for more illiquid properties. Therefore, when setting their optimum list price, an owner must balance the potential marginal utility that can come from a higher price versus the marginal disutility of a longer time on market (TOM).

2019

This paper offers a novel index to identify pricing trends in the housing market, based on the difference between sellers’ initial asking price and the final transaction price of the same property (the "Willingness to Compromise" Index). To construct this index, we use data from ``Yad2``, the leading classified ads website in Israel, on individual ads for real estate properties offered for sale and data reported by the Israel Tax Authority on final transactions. We then apply the index to 28,933 real-estate transactions in 28 Israeli cities between 2015 and 2017. Our analysis documents a significant increase in the willingness to compromise between the third quarter of 2016 and the third quarter of 2017. This increase was observed in nearly all cities in the sample, including when controlling for property characteristics. Our findings also suggest that the increase in willingness to compromise was greater in cities where lotteries associated with the government-subsidized ...

International Review of Law and Economics, 1998

This paper provides one reason why the level of trading in the housing market is volatile. We show that when uncertainty is high and can be expected to be resolved in the near future, both buyers and sellers have an incentive to postpone trading until uncertainty has been resolved. In the model, agents trade in the housing market either now, when there is uncertainty concerning the future tax rule for house owners, or later, when this uncertainty has been resolved. Under the assumption of risk neutrality (and high transaction costs), we show that any rational expectations equilibrium involves all trading being postponed. When agents are risk averse, this result holds less generally; we show that it does hold when changes in the tax rule are expected not to affect the future price of houses too strongly.

SSRN Electronic Journal

We model listing decisions in the housing market, and structurally estimate household preference and constraint parameters using comprehensive Danish data. Sellers optimize expected utility from property sales, subject to down-payment constraints, and internalize the effect of their choices on final sale prices and time-onthe-market. The data exhibit variation in the listing price-gains relationship with "demand concavity;" bunching in the sales distribution; and a rising listing propensity with gains. Our estimated parameters indicate reference dependence around the nominal purchase price and modest loss aversion. A new and interesting fact that the canonical model cannot match is that gains and down-payment constraints have interactive effects on listing prices.

Journal of Real Estate Finance and Economics, 1991

The terms buyers' market and sellers' market are commonly used in contexts that most economists would characterize as excess supply and excess demand. It is puzzling, however, that in many instances the press and general public are all aware that it is a buyers' or sellers' market. Are these markets really that inefficient? We offer definitions of buyers' and sellers' markets that are consistent with a full rational expectations equilibrium in a simple general equilibrium search model of a heterogeneous durable goods market.

Journal of Property Research, 2020

In this paper, we set up a two-sided random search model to study the trading behaviour between buyers and sellers in the commercial real estate market. Our model shows that the interaction between search and bargaining has a profound influence on the role played by the market search friction regarding the equilibrium transaction price of commercial property and the well-being of both buyers and sellers. Against the traditional view that the existence of search friction always plays a negative role in the commercial real estate market, we find that under some conditions the market search friction can increase the equilibrium transaction price of commercial property and thus benefit sellers, which is considered the most valuable especially during the downturn of a business cycle.

The objective of this paper is twofold. One is to provide a search-theoretical model of the marketing choice of the seller. The model explains the seemingly contradictory empirical results as to whether a seller raises the price of his house to pass on a portion of the broker's commission to the buyer. The second is to offer empirical evidence on the impact of the MLS on the price. We control for selectivity bias in the data and obtain a surprising result that the decision to use a multiple listing service decreases the sale price of a property.

International Economic …, 2007

Abstract A theoretical model is developed of house market disequilibrium. Price and quantity adjustments occur as the consequence of inventory adjustment in the absence of a market-maker. This approach reveals a process of dynamic adjustment whereby sellers alter their reservation prices in response to implicit time on the market as a signal of excess demand. Unobservable equilibrium house prices are estimated using time on the market and house price data for Glasgow between 1999 and 2007. Empirical estimation models sellers' reservation price response to the overhang of unsold houses and the excess demand curve within an econometric framework.