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The Home Selling Problem: Theory and Evidence

Author

Listed:
  • Merlo, Antonio

    (Rice University)

  • Ortalo-Magne, Francois

    (University of WI)

  • Rust, John

    (Georgetown University)

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an initial list price with subsequent weekly decisions on how much to adjust the list price until the home is sold or withdrawn from the market.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-Magne (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 GBP for a home worth 100,000 GBP), is sufficient to explain the high degree of "stickiness" of listing prices observed in the data.

Suggested Citation

  • Merlo, Antonio & Ortalo-Magne, Francois & Rust, John, 2014. "The Home Selling Problem: Theory and Evidence," Working Papers 14-016, Rice University, Department of Economics.
    • Handle: RePEc:ecl:riceco:14-016
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    File URL: http://economics.rice.edu/rise/working-papers/home-selling-problem-theory-and-evidence
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    References listed on IDEAS

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    Cited by:

    1. Julien Pascal, 2023. "Rental housing market and directed search," BCL working papers 179, Central Bank of Luxembourg.
    2. Hedlund, Aaron, 2016. "Illiquidity and its discontents: Trading delays and foreclosures in the housing market," Journal of Monetary Economics, Elsevier, vol. 83(C), pages 1-13.
    3. Paul E. Carrillo & William M. Doerner & William D. Larson, 2023. "House Price Markups and Mortgage Defaults," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(4), pages 747-782, June.
    4. Bell, Adrian R. & Brooks, Chris & Killick, Helen, 2022. "The first real estate bubble? Land prices and rents in medieval England c. 1300–1500," Research in International Business and Finance, Elsevier, vol. 62(C).
    5. Daniel Broxterman & Tingyu Zhou, 2023. "Information Frictions in Real Estate Markets: Recent Evidence and Issues," The Journal of Real Estate Finance and Economics, Springer, vol. 66(2), pages 203-298, February.
    6. Fan, Ying & Fu, Yuqi & Yang, Zan & Chen, Ming, 2024. "Search frictions in rental markets: Evidence from urban China," China Economic Review, Elsevier, vol. 83(C).
    7. Han, Lu & Strange, William C., 2015. "The Microstructure of Housing Markets," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 813-886, Elsevier.
    8. Eileen van Straelen, 2021. "Desperate House Sellers: Distress Among Developers," Finance and Economics Discussion Series 2021-065, Board of Governors of the Federal Reserve System (U.S.).
    9. Eerola, Essi & Lyytikäinen, Teemu, 2015. "On the role of public price information in housing markets," Regional Science and Urban Economics, Elsevier, vol. 53(C), pages 74-84.
    10. Tingyu Zhou & John M Clapp & Ran Lu‐Andrews, 2022. "Examining omitted variable bias in anchoring premium estimates: Evidence based on assessed value," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 789-828, September.
    11. Borys Grochulski & Zhu Wang, 2024. "Real Estate Commissions and Homebuying," Working Paper 24-01, Federal Reserve Bank of Richmond.
    12. Vandenbergh, Joren, 2024. "Seller and search behavior in the Belgian housing market," Journal of Housing Economics, Elsevier, vol. 64(C).
    13. Duranton, Gilles & Puga, Diego, 2015. "Urban Land Use," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 467-560, Elsevier.
    14. John M. Clapp & Ran Lu‐Andrews & Tingyu Zhou, 2020. "Anchoring to Purchase Price and Fundamentals: Application of Salience Theory to Housing Cycle Diagnosis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 48(4), pages 1274-1317, December.
    15. Fan, Ying & Fu, Yuqi & Yang, Zan & Chen, Ming, 2023. "Search Frictions in Rental Markets: Evidence from Urban China," Working Paper Series 23/11, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    16. Lawrence Kryzanowski & Yanting Wu, 2023. "Signaling effects of recurrent list‐price reductions on the likelihood of house sales," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 99-130, February.
    17. Elliot Anenberg & Steven Laufer, 2014. "Using Data on Seller Behavior to Forecast Short-run House Price Changes," Finance and Economics Discussion Series 2014-16, Board of Governors of the Federal Reserve System (U.S.).

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    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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