Price Discovery with Heterogeneous Sellers in Real Estate

This paper provides a theoretical framework to examine how the differences in seller motivation can potentially affect the distribution of home prices. Heterogeneous seller behavior, strategies, and decisions cause observable transaction prices to be “noisy” in the sense that the observed data may be biased indicators of the underlying property values or market conditions. Such noise makes data interpretation rather challenging for market participants. Compared to the extensive research on property heterogeneity, little effort has been devoted to studying the effect of seller heterogeneity on prices. This paper conducts a formal analysis to quantify the heterogeneous seller motivations and their impact on prices, and allows the inference of unobserved value from observed “noisy” prices. The paper presents a set of closed-form formulae that enable analysts to (a) filter out the noises in observed transaction prices to uncover the true value information (the selling prices by unconstrained sellers), and (b) to infer the price expectation of individually constrained sellers.