The Trade-Off between the Selling Price of Residential Properties and Time-on-The-Market: The Impact of Price Setting

Abstract

When a house is placed on the market, the seller must choose the initial offer price. Setting the price too high or too low affects the marketability of the property. While there is near universal agreement that the seller faces a trade-off between selling at a higher price and selling in less time, there is less agreement about how to measure this trade-off. This paper offers a framework for analysis and shows that an increase in the list price increases expected time-on-the-market. Because house buyers must solve a type of signal extraction problem, the effect of a higher list price is magnified for houses in a market segment having a low predicted variance of the list price. This paper also shows that the list price of houses which are withdrawn before sale has a higher mean and variance, and that the possibility of withdrawal censors information about the time-on-the-market.

Keywords: list price, over-pricing, duration model, sale price, hedonic price function, liquidity, bargaining power, search, matching, time-on-the-market, time-till-sale, withdrawal, censoring, omitted variables

JEL Classification: C41, D81, D83, R31