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Trading Frictions and House Price Dynamics

Authors


  • We would like to thank Humberto Ennis, Jonathan Heathcote, Haifang Huang, Ricardo Lagos, François Ortalo-Magné, Richard Peach, Robert Shimer, Gianluca Violante, and Pierre-Olivier Weill for helpful discussions and Peter Karadi for invaluable research assitance. This reseasrch was supported by the National Science Foundation under grant no. SES-0648545.

Abstract

We model liquidity in housing markets. The model provides a simple characterization for the joint process of prices, sales, and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model. Informational frictions show promise.

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