Why Do Sellers Hold Out in the Housing Market? An Option‐Based Explanation. (1st November 2012)

• Record Type: Journal Article
• Authors: Qian, Wenlan
• Is Part Of: Real estate economics. Volume 41:Number 2(2013:Summer)
• Page Start: 384
• Page End: 417
• Publication Date: 2012-11-01
• Subjects: Real estate business -- United States -- Periodicals; Urban economics -- Periodicals; 333.33097
• DOI: 10.1111/j.1540-6229.2012.00345.x
• Languages: English
• ISSNs: 1080-8620

Abstract

<abstract abstract-type="main"> <title> <x xml:space="preserve">Abstract</x> </title> <p>In the residential housing market, home owners are reluctant to sell in a declining market. We build a model which focuses on the embedded call option associated with home ownership that allows owners to delay the (irreversible) sale. When prices are low, the (opportunity) cost of a sale, i.e., a higher implied gain from a future sale, likely exceeds its immediate trade benefit and an owner is better off waiting for market conditions to improve. The model also highlights the importance of supply conditions: a more constrained supply is associated with a longer delay. Using state‐level residential housing data, we find evidence consistent with the model. Transaction volume is increasing (decreasing) in the rental growth rate (volatility) in the cross section; their effects are amplified in areas with low supply elasticities, and in times with low market prices. Overall, this paper provides a rational explanation for delayed trading decisions in the housing market.</p> </abstract>