Is Selection Bias Inherent in Housing Transactions? An Equilibrium Approach

Abstract

We develop an equilibrium model for residential housing transactions in an economy with houses that differ in their quality and households that differ in their planned holding horizon. We show that, in equilibrium, clientele effect persists, with long-horizon buyers overwhelmingly choosing higher quality properties and short-horizon buyers settling for lower quality properties. This clientele effect creates a sample selection bias: the properties that are on the market are predominantly of lower quality. Since these are the preferred choice of short-horizon buyers, they demonstrate a faster turnover. Both the clientele effect and the selection bias are more pronounced with an increase in the variance of house quality and in the variance of planned holding horizon. Our theoretical model supports empirical evidence on the existence of such bias in home price indices and explains it by the differences in ex ante holding horizons.

Keywords: sample selection bias, clientele effect, illiquidity, search and match, housing, buyer heterogeneity, time on the market

JEL Classification: D40, D82, D83, D50, G12, R21, R31