Fiscal Shocks in a Heterogeneous Matching Model of the Housing Market

45 Pages Posted: 26 Sep 2016

Date Written: April 2014

Abstract

This paper analyzes the impact of a tax policy shock on the macroeconomics of the housing market. I develop a structural search and matching model of the housing market with heterogeneous demand, which is solved numerically. I show that after a negative demand shock there is a composition effect on price due to an upward distortion of match surplus by a tax credit. This means that sellers mitigate downward adjustment of sales prices by accepting a longer wait for to match with a better fit if a tax incentive is offered to searcher-buyers, compared to the counterfactual. This result derives from the heterogeneity of buyers when matching frictions exist, and thereby provides a new explanation of slow downward price adjustment in the housing market after a negative demand shock. I use the model to analyze the impact of the Federal Home Buyer Tax Credit of 2008-2010 on sales, vacancy duration and house prices. I find that the credit raises total sales by inducing buyers to purchase housing units they would previously consider not to be a good fit. The effect is increasing in the actual amount of the tax credit. The paper verifies that the policy is successful in reducing unsold vacancies while boosting average price above steady state.

Keywords: housing , search and matching , housing tax credit

JEL Classification: E00, R30, R38

Suggested Citation

Aqeel, S. Aneeqa, Fiscal Shocks in a Heterogeneous Matching Model of the Housing Market (April 2014). Available at SSRN: https://ssrn.com/abstract=2842744 or http://dx.doi.org/10.2139/ssrn.2842744

S. Aneeqa Aqeel (Contact Author)

Lake Forest College ( email )

555 N. Sheridan Road
Lake Forest, IL 60045
United States

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