A disequilibrium model of the market for houses: implicit selling time as a signal of optimal holding periods and buyer valuation

A theoretical model is developed of house market disequilibrium. Price and quantity adjustments occur as the consequence of inventory adjustment in the absence of a market-maker. This approach reveals a process of dynamic adjustment whereby sellers alter their reservation prices in response to implicit time on the market as a signal of excess demand. Unobservable equilibrium house prices are estimated using time on the market and house price data for Glasgow between 1999 and 2007. Empirical estimation models sellers ’ reservation price response to the overhang of unsold houses and the excess demand curve within an econometric framework. boom by loss aversion. That is, after a boom, the market values of houses fall below the prices that the current owners paid for them. Loss-averse owners attempt to attenuate their losses by setting higher reservation prices that excceed the asking prices they would have set in the absence of a loss. Consequently, these houses spend a longer time on the market and also receive a higher transaction price when sold. Genesove and Mayer (2001) provide empiri-cal evidence that substantiates the hypothesis