Efficiency in the Housing Market with Search Frictions

Miroslav Gabrovski and Victor Ortego-Marti

No 202108, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper studies efficiency in the housing market in the presence of search frictions and endogenous entry of buyers and sellers. These two features are essential to explain the housing market stylized facts, in particular to generate an upward-sloping Beveridge Curve in the housing market. Search frictions and endogenous entry create two externalities in the market. First, there is a congestion externality common to markets with search frictions. Sellers do not internalize the effect of listing a house for sale on other sellers' probability of finding a buyer, and on buyers' home finding rate. Second, the endogenous entry of buyers leads to a composition externality, as new entrants in the markets value housing less and worsen the distribution of buyers' valuations and surplus. The equilibrium is inefficient even when the Hosios-Pissarides-Mortensen condition holds. We quantify the size of these externalities and how far the observed housing market is from the optimal allocation. The optimal vacancy rate, time-to-sell, and vacancies are about half their equilibrium counterparts, whereas the optimal number of buyers and homeowners are slightly above their decentralized equilibrium values. Finally, we investigate the effect of housing market policies on the equilibrium and how they can restore efficiency in the housing market.

Keywords: Housing market; Search and matching; Beveridge Curve; Housing liquidity; Efficiency; housing policy (search for similar items in EconPapers)
JEL-codes: E2 E32 R21 R31 (search for similar items in EconPapers)
Pages: 26 Pages
Date: 2021-05
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://economics.ucr.edu/repec/ucr/wpaper/202108.pdf First version, 2021 (application/pdf)

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