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The Trade-off Between the Selling Price of Residential Properties and Time -on-the-Market: The impact of the Price Setting

Author

Listed:
  • Paul Anglin
  • Ronald Rutherford
  • Thomas Springer
Abstract
When a house is placed on the market, the seller must choose a ìlistî or ìaskingî price. While there is near universal agreement that a house seller faces a trade off in choosing this price, there is less agreement about how to measure this trade off. This paper offers a model based on the idea of managing risks and a trade off between the expected sale price and the expected time-till-sale. We show that this model produces an optimal decision rule as a function of the state of the market and the characteristics of the seller. We predict that a higher list price increases expected time-till-sale. The theory also predicts that, since house buyers must solve a signal extraction problem when deciding which houses to inspect, the effect of a higher list price is magnified for houses with a low predicted variance of the list price. Using a data set with 3874 observations from Texas, we test these hypotheses using a hazard model based on a Weibull model with gamma correction for unobserved heterogeneity. The proposed methodology differs from the most common method (two-stage least squares as used by, for example, Yavas and Yang, REE, 1995) and is closer to Glower, Haurin and Hendershott (REE, 1998). We estimate the effect of changes in list price on the time-till-sale (TTS) using what can be likened to a reduced form model. This paper does not attempt to predict the sale price because our model implies that this data set, like all previously used data sets, would be contaminated by omitted variables that have a nearly equal effect on the list price and the sale price. Our analysis shows that few of the characteristics of the house significantly affect the expected time on market while various indicators of market conditions do affect TTS. Our paper demonstrates the value of recognizing censoring in the data. Censoring reduces the information contained in duration data and its effect has only been considered by one other paper (Kalra and Chan, JRER, 1994). Approximately 40 percent of listings in our data set do not result in a house sale and our theory is sufficiently general that it can be used to analyse the behaviour of such sellers. We show that the list prices of unsold listings have a higher mean and higher variance than listings where the house sold. We demonstrate that the change in estimation methodology affects the magnitude and significance of the estimated coefficients.

Suggested Citation

  • Paul Anglin & Ronald Rutherford & Thomas Springer, 2001. "The Trade-off Between the Selling Price of Residential Properties and Time -on-the-Market: The impact of the Price Setting," ERES eres2001_105, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2001_105
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    References listed on IDEAS

    as
    1. Wheaton, William C, 1990. "Vacancy, Search, and Prices in a Housing Market Matching Model," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1270-1292, December.
    2. Genesove, David & Mayer, Christopher J, 1997. "Equity and Time to Sale in the Real Estate Market," American Economic Review, American Economic Association, vol. 87(3), pages 255-269, June.
    3. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 379-406.
    4. Donald Haurin, 1988. "The Duration of Marketing Time of Residential Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 396-410, December.
    5. Rajiv Kalra & Kam C. Chan, 1994. "Censored Sample Bias, Macroeconomic Factors, and Time on Market of Residential Housing," Journal of Real Estate Research, American Real Estate Society, vol. 9(2), pages 253-262.
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    7. Hwang, Hae-shin & Mortensen, Dale T & Reed, W Robert, 1998. "Hedonic Wages and Labor Market Search," Journal of Labor Economics, University of Chicago Press, vol. 16(4), pages 815-847, October.
    8. Michel Glower & Donald R. Haurin & Patric H. Hendershott, 1998. "Selling Time and Selling Price: The Influence of Seller Motivation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(4), pages 719-740, December.
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    11. Abdullah Yavas & Shiawee Yang, 1995. "The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 347-368, September.
    12. Chen, Yongmin & Rosenthal, Robert W, 1996. "Asking Prices as Commitment Devices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(1), pages 129-155, February.
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    14. Krainer, John, 2001. "A Theory of Liquidity in Residential Real Estate Markets," Journal of Urban Economics, Elsevier, vol. 49(1), pages 32-53, January.
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    17. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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