Search, Liquidity, and the Dynamics of House Prices and Construction

Allen Head, Huw Lloyd-Ellis, Hongfei Sun
2014 The American Economic Review  
We characterize the dynamics of relative house prices, housing sales, construction rates and population growth in response to city-speci...c income shocks for 106 US cities. We then develop a dynamic search model of the housing market in which construction, the entry of buyers, house prices and sales are endogenously determined in equilibrium. Our theory generates dynamics that are qualitatively consistent with our empirical observations and a version of the economy calibrated to match long-run
more » ... d to match long-run features of the housing market in U.S. cities o¤ers a substantial quantitative improvement over similar models with no search. In particular, variation in the time it takes to sell a house (i.e. the house's liquidity) induces house values and transaction prices to exhibit momentum, or serially correlated growth. Journal of Economic Literature Classi...cation: E30, R31, R10
doi:10.1257/aer.104.4.1172 fatcat:wk72rv3iu5a2vk7rf65zdayeny