Flipping the Housing Market

61 Pages Posted: 27 Jan 2017

See all articles by Charles K. Leung

Charles K. Leung

City University of Hong Kong

Chung-Yi Tse

The University of Hong Kong - School of Economics and Finance

Date Written: 2017-01-01


We add arbitraging middlemen -- investors who attempt to profit from buying low and selling high -- to a canonical housing market search model. Flipping tends to take place in sluggish and tight, but not in moderate, markets. There is the possibility of multiple equilibria. In one equilibrium, most, if not all, transactions are intermediated, resulting in rapid turnover, a high vacancy rate, and high housing prices. In another equilibrium, few houses are bought and sold by middlemen. Turnover is slow, few houses are vacant, and prices are moderate. Moreover, flippers can enter and exit en masse in response to the smallest interest rate shock. The housing market can then be intrinsically unstable even when all flippers are akin to the arbitraging middlemen in classical finance theory. In speeding up turnover, the flipping that takes place in a sluggish and illiquid market tends to be socially beneficial. The flipping that takes place in a tight and liquid market can be wasteful as the efficiency gain from any faster turnover is unlikely to be large enough to offset the loss from more houses being left vacant in the hands of flippers. Based on our calibrated model, which matches several stylized facts of the U.S. housing market, we show that the housing price response to interest rate change is very non-linear, suggesting cautions to policy attempts to “stabilize” the housing market through monetary policy.

JEL Classification: D83, G12, R30

Suggested Citation

Leung, Charles Ka Yui and Tse, Chung, Flipping the Housing Market (2017-01-01). Globalization and Monetary Policy Institute Working Paper No. 301, Available at SSRN: https://ssrn.com/abstract=2906694 or http://dx.doi.org/10.24149/gwp301

Charles Ka Yui Leung (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Hong Kong

Chung Tse

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong
+852 2859 1035 (Phone)
+852 2548 1152 (Fax)

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