The Home Selling Problem: Theory and Evidence

Antonio Merlo, François Ortalo-Magné () and John Rust ()
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François Ortalo-Magné: Wisconsin School of Business, University of Wisconsin-Madison
Authors registered in the RePEc Author Service: Francois Ortalo-Magne

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper formulates and solves the problem of a homeowner who wants to sell her house for the maximum possible price net of transactions costs (including real estate commissions). The optimal selling strategy consists of an initial list price with subsequent weekly decisions on how much to adjust the list price until the home is sold or withdrawn from the market. The solution also yields a sequence of reservation prices that determine whether the homeowner should accept offers from potential buyers who arrive stochastically over time with an expected arrival rate that is a decreasing function of the list price. We estimate the model using a rich data set of complete transaction histories for 780 residential properties in England introduced by Merlo and Ortalo-Magné (2004). For each home in the sample, the data include all listing price changes and all offers made on the home between initial listing and the final sale agreement. The estimated model fits observed list price dynamics and other key features of the data well. In particular, we show that a very small “menu cost†of changing the listing price (estimated to equal 10 thousandths of 1% of the house value, or approximately £10 for a home worth £100,000) is sufficient to explain the high degree of “stickiness†of listing prices observed in the data.

Keywords: housing; bargaining; sticky prices; optimal selling strategy; dynamic programming (search for similar items in EconPapers)
JEL-codes: H5 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-01-30
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: THE HOME SELLING PROBLEM: THEORY AND EVIDENCE (2015)
Working Paper: The Home Selling Problem: Theory and Evidence (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:13-006

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