Quality Uncertainty in Housing Markets

41 Pages Posted: 6 Nov 2017 Last revised: 10 Feb 2019

See all articles by Jordan Martel

Jordan Martel

Indiana University Bloomington - Kelley School of Business

Date Written: January 10, 2018

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

Suggested Citation

Martel, Jordan, Quality Uncertainty in Housing Markets (January 10, 2018). Available at SSRN: https://ssrn.com/abstract=3064340 or http://dx.doi.org/10.2139/ssrn.3064340

Jordan Martel (Contact Author)

Indiana University Bloomington - Kelley School of Business ( email )

1309 E 10th Street, Hodge Hall 4100
Bloomington, IN 47405
United States

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