Quality Uncertainty in Housing Markets

Abstract

In this paper, I quantify the effect of buyers' uncertainty about a home's quality on its pricing and liquidity. I first develop a parsimonious model of home sale in which buyers learn about the home's quality from a walkthrough and from the home's days-on-market. Quality uncertainty distorts prices and delays trade. As time passes, buyers become pessimistic and sale prices fall. Using transaction-level data from Denver, Charlotte, and Detroit, I structurally estimate counterfactual days-on-market and sale prices for six hundred thousand homes that sold between 2005 and 2015. The costs of quality uncertainty are borne by sellers of high quality homes through mispricing, and by sellers of low quality homes through illiquidity: relative to a market in which home quality were known to buyers, high quality homes take 11 days longer to sell, and sell for 8.0% less, while low quality homes take 47 days longer to sell, and sell for 4.5% more.

Keywords: Days on Market, Search, Observational Learning, Dynamic Adverse Selection

JEL Classification: C73, D83, R31