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Efficiency in the Housing Market with Search Frictions

Author

Listed:
  • Miroslav Gabrovski

    (University of Hawaii Manoa)

  • Victor Ortego-Marti

    (Department of Economics, University of California Riverside)

Abstract

This paper studies efficiency in the housing market in the presence of search frictions and endogenous entry of buyers and sellers. These two features are essential to explain the housing market stylized facts, in particular to generate an upward-sloping Beveridge Curve in the housing market. Search frictions and endogenous entry create two externalities in the market. First, there is a congestion externality common to markets with search frictions. Sellers do not internalize the effect of listing a house for sale on other sellers' probability of finding a buyer, and on buyers' home finding rate. Second, the endogenous entry of buyers leads to a composition externality, as new entrants in the markets value housing less and worsen the distribution of buyers' valuations and surplus. The equilibrium is inefficient even when the Hosios-Pissarides-Mortensen condition holds. We quantify the size of these externalities and how far the observed housing market is from the optimal allocation. The optimal vacancy rate, time-to-sell, and vacancies are about half their equilibrium counterparts, whereas the optimal number of buyers and homeowners are slightly above their decentralized equilibrium values. Finally, we investigate the effect of housing market policies on the equilibrium and how they can restore efficiency in the housing market.

Suggested Citation

  • Miroslav Gabrovski & Victor Ortego-Marti, 2021. "Efficiency in the Housing Market with Search Frictions," Working Papers 202108, University of California at Riverside, Department of Economics.
    • Handle: RePEc:ucr:wpaper:202108
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    References listed on IDEAS

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    Cited by:

    1. Miroslav Gabrovski & Victor Ortego-Marti, 2025. "Home Construction Financing and Search Frictions in the Housing Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 55, January.
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    More about this item

    Keywords

    Housing market; Search and matching; Beveridge Curve; Housing liquidity; Efficiency; housing policy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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