A Model of Sales, Prices, and Liquidity in the Housing Market

I embed a search and matching model of the housing market into a DSGE framework and use it to address three main questions. First, what model of search and price determination best describes the housing market? Second, can a general equilibrium model generate the observed correlations between housing market variables? Third, what shocks have driven the historical behavior of the housing market, especially the recent boom and bust in house prices? I show that a model of competitive search is more likely conditional on the data than a model featuring random search and bargaining. Simulated data from the model qualitatively matches the correlations between key housing market time series. Finally, estimation results imply that the recent housing boom and bust were associated with a large increase and subsequent decrease in the pool of eligible buyers, in addition to expectations of higher future productivity that turned out not to be realized. ∗I would like to thank Rudi Bachmann, Bob Barsky, and seminar participants at the University of Michigan for their help and advice. Please send comments or suggestions by e-mail at [email protected] or by mail at University of Michigan, Department of Economics, 611 Tappan St. Ann Arbor, MI 48109.