Market Thickness and the Impact of Unemployment on Housing Market Outcomes

91 Pages Posted: 13 Mar 2017

See all articles by Li Gan

Li Gan

Texas A&M University - Department of Economics; National Bureau of Economic Research (NBER)

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Qinghua Zhang

Peking University - Guanghua School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2017

Abstract

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

Gan, Li and Wang, Pengfei and Zhang, Qinghua, Market Thickness and the Impact of Unemployment on Housing Market Outcomes (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2931363 or http://dx.doi.org/10.2139/ssrn.2931363

Li Gan

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Qinghua Zhang (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

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