By Rachel Ngai and Kevin Sheedy
The number of houses for sale is as volatile as sales volume and much more volatile than house prices, yet it has received relatively little attention. What drives volatility in the number of houses for sale? Is it due to changes in the difficulty of selling houses or changes in the incentive to put houses up for sale? This paper presents evidence that both inflows and outflows are important using a variance decomposition. It then uses a search-and-matching model with both the decision of when to agree a sale (outflows) and the decision of when to put a house up for sale (inflows) to understand the behaviour of sales, listings, and prices in the housing market. Quantitatively, the model does a much better job of matching relative volatility and correlations between housing-market variables than those that abstract from the inflow decision.
The paper makes and valid and important point: The decision to put a house on the market is highly strategic and neglected in the literature. And it turns out it matters greatly. And of course expectations matter a lot, and it would be great to integrate differ models of expectation formation in this line of work. Real estate is prone to bubbles, so this matters.