Underpricing Regimes in Housing Markets

48 Pages Posted: 14 Jun 2016 Last revised: 9 Dec 2016

Date Written: November 24, 2016

Abstract

I study a staggered policy change intended to reduce bidding wars for homes by increasing their list price and eliminating underpricing. Using a novel and large micro data set and a difference-in-difference methodology, I find that increasing the list price reduces the buyer arrival rates in all stages of the search process – online, at the open houses, and during bidding – and increases the probability of a failed sale. I find a strong null effect on the sales price which can be bounded to a tight interval around zero. I find no effect on the sales effort exerted by real estate agents, nor on time-on-market. To explain these findings, I develop a search model where a non-committing list price is set optimally by real estate agents and where the list price directs buyers’ search. The model is consistent with the empirical results if home buyers follow a simple rule of thumb, but not when they act fully rationally.

Keywords: Real estate prices, listing prices, bidding wars, auctions

JEL Classification: R21, R30, R38, C57, D83, C78

Suggested Citation

Österling, Anders Eskil, Underpricing Regimes in Housing Markets (November 24, 2016). Available at SSRN: https://ssrn.com/abstract=2795031 or http://dx.doi.org/10.2139/ssrn.2795031

Anders Eskil Österling (Contact Author)

Stockholm University, Students ( email )

Stockholm
Sweden

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