Modeling House Prices: Theory and Estimation

We study housing markets with price posting, directed search, and heterogeneity. The framework is consistent with two stylized facts: dispersion (similar houses list at different prices); and stickiness (some prices do not adjust when market conditions change). Existence, uniqueness and comparative statics are characterized analytically. Using novel data from Vancouver’s housing market, we show the model is qualitatively consistent with the evidence. We also show how to identify and estimate it. Structural estimation reveals this: given reasonable heterogeneity in buyer preferences, search contributes little to price dispersion. Assuming most of it is due to unobserved heterogeneity in houses, while search accounts for only a fraction of price dispersion, that fraction is enough to easily explain price stickiness.