Local Constant-Quality Housing Market Liquidity Indices
44 Pages Posted: 15 May 2019
Date Written: May 13, 2019
The average time on market (TOM) of sold properties is frequently used by practitioners and policymakers as a market liquidity indicator. This figure might be misleading as the average TOM only considers properties that have been sold. Furthermore, traded properties are heterogeneous. Since these features differ over the cycle, the average TOM could provide wrong signals about market liquidity. These problems are more severe in markets where properties trade infrequently. In this paper, a methodology is provided that allows for the construction of constant-quality housing market liquidity indices in thin markets that can be estimated up to the end of the sample. The latter is particularly important since market watchers are generally interested in the most recent information regarding market liquidity and less in historical information. Using individual transactions data on three different types of Dutch municipalities (small, medium, and large) it is shown that the average TOM overestimates market liquidity in bad times and underestimates market liquidity in good times. The option to withdraw is the most important reason why the average TOM is misleading. Furthermore, constant-quality liquidity leads the average TOM and price changes. The indices not only show that illiquidity is higher during busts, but also that liquidity risk is higher. Additional results suggest that setting a high list price relative to the estimated value results in a higher TOM, but this effect differs over time. Both the list price premium and the effect on sale probability are higher during busts. Differences in housing quality over the cycle, however, also play a significant role. Finally, the method allows for the construction of indices that are more robust to revisions, especially in thinner markets.
Keywords: Liquidity, Housing, Quality, Index, Thin markets
JEL Classification: R30, C11, C41
Suggested Citation: Suggested Citation