Market Thickness and the Impact of Unemployment on Housing Market Outcomes
91 Pages Posted: 13 Mar 2017
Date Written: February 15, 2017
This paper develops a search-matching model to study the impact of the unemployment rate on the housing market in the presence of the thick market effect. We estimate the structural model using Texas city-level data that covers three years, 1990, 2000 and 2010. Our simulations based on the structural estimates help identify the channel through which the thick market effect amplifies the impact of the unemployment rate on housing market outcomes. Specifically, we show that an increase in unemployment generates a thinner market, which leads to poorer matching quality on average. As a result, prices and transaction volumes both decline more than they would in the absence of the thick market effect. In particular, a three-percentage-point increase in the unemployment rate lowers the price by 10.74% and reduces the transaction volume by 5.49%. Furthermore, our simulations show that when a feedback mechanism from housing prices to unemployment is incorporated, the thick market effect amplifies the impact of initial unemployment shocks by an even greater extent. In addition, we find that larger cities with higher populations experience milder price changes in response to changes in the unemployment rate compared to smaller cities.
Keywords: housing markets, unemployment rate, thick market effect, search-matching
JEL Classification: E, R
Suggested Citation: Suggested Citation