The Market Thickness and the Impact of Unemployment on Housing Market Outcomes

The housing market exhibits a puzzling phenomenon that transaction volume and prices are strongly positively correlated. This paper develops and estimates a dynamic search-matching model to study the impact of the unemployment rate on the housing market in the presence of the thick market effect. Our analysis shows that an increase in the unemployment reduces the number of buyers, weakens the homeowners’ tendency to change houses and generates poorer matching quality. As a consequence, prices and the transaction volume both decline more than in the absence of the thick market effect. In particular, at 7.0% unemployment rate, the price-unemployment elasticity is -0.0508 in the short run and -0.0588 in the long run, and the volume-unemployment elasticity is -0.260 in the short run and -0.198 in the long run, corresponding to a volume-price elasticity 5.118 in the short run and 3.367 in the long run, comparable with the observed aggregate elasticity of 4. In addition, a larger city with typically more buyers and sellers experiences a smaller change in prices in response to the same change in the unemployment rate.