Contigent Price Contracts and the Efficiency of Housing Markets

Stephen Day Cauley

Real Estate Economics, 1994, vol. 22, issue 4, 583-602

Abstract: Frequently, the response of housing markets to a large negative demand shock is a period during which the liquidity of housing declines, but the price at which transactions take place changes little. In this paper we show that a decline in liquidity can result from the inabilities of sellers and buyers to insure against post‐shock price uncertainty. We conclude, that the introduction of a risk‐sharing contingent price contract may increase the post‐shock liquidity of housing by providing insurance against post‐shock price uncertainty. Finally, we show that a mutually agreeable contingent price contract will always exist, even when sellers are excessively optimistic.

Date: 1994
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